Canadian growth has averaged nearly 3% over the past four years, broadly in line with the trend over the past two decades, and more of the same is likely in 2006 and 2007, according to a forecast prepared by Scotia Economics.

Ongoing strength in domestic demand has compensated for the drag from external trade stemming from the loonie’s higher valuation vis-à-vis the U.S. currency and the gradual erosion of Canada’s market share of U.S. non-energy imports to low-cost overseas producers.

Increasing momentum in energy-rich Western Canada will counterbalance the softer expansion in other regions.

“Canada may even regain G7 leadership by the end of this period if, as we expect, the pace of U.S. activity moves down to a sub-3% trajectory for the first time in nearly half a decade,” said Warren Jestin, chief economist, Bank of Nova Scotia, in a release.

As usual, China will top the world performance charts, growing by 8 1/2% to 9% annually, with India cruising along a 7% to 7 1/2% trend.

The U.S. Federal Reserve is likely to push borrowing costs up another half percentage point in the opening months of 2006 to dampen inflationary pressures. Even with core inflation still below 2%, the Bank of Canada may outdo the Fed in precautionary tightening because of concerns that inflation will move higher in the face of the lowest national unemployment rate in a generation, mounting evidence of skilled labour shortages, and rising capacity constraints.

With Washington’s fiscal deficit stuck above US$300 billion and with the merchandise trade deficit skyrocketing above US$800 billion, the U.S. greenback will likely return to a weakening trend. In a weakening U.S. dollar environment, Canada’s strong balance of payments and strategic position in energy and industrial resources suggest that the loonie will soon soar to US90¢ or beyond.