Weakening economic fundamentals, coupled with the events of September 11, have caused growth in North America and the rest of the world to downshift according to RBC Financial Group Economics in its latest quarterly forecast

However, RBC Economics predicts that steps taken to support economies around the world will lift economic prospects, with a return to stronger growth in 2002.

According to the RBC forecast, economic growth in both the U.S. and Canada “will bounce around zero for a couple of quarters,” leaving the annual real growth rate for 2001 at 1.2% in the U.S. and 1.6% in Canada.

“In North America, economic conditions are now bordering on recession, but even if a technical recession does ensue, it should be short-lived and shallow,” says Craig Wright, RBC Financial Group vice president and chief economist. “Central banks have been cutting rates aggressively with further cuts expected, while the government steps up its support for growth. Recovery hopes are down but not out.”

In the United States., interest rate cuts, government initiatives, a lower dollar, reduced energy prices, and a largely corrected inventory imbalance will stabilize confidence and move the American economy higher in 2002 with GDP growth of 1.9%, RBC says.

It is also looking for a similar turnaround in Canada’s growth prospects in 2002, expecting the economy to accelerate to 2%.

“While much will depend on U.S. developments, some made-in-Canada forces will spur growth higher,” Wright says.

“Canadian interest rates have moved lower and further cuts are likely, the tax stimulus introduced early in the year will continue to provide a cushion for the consumer and the Canadian dollar has moved down to levels that are competitive by any measure.”

Wright cautions that forecasting in this environment is challenging as there are many uncertainties; in addition current risks are both numerous and to the downside.

“The key risk is confidence — consumer, business and investor. No one knows for sure how heavy the blow to confidence from recent events will be. The growth implications of recent events will certainly vary by province with those provinces closely linked to the U.S. shouldering much of the pain,” says Wright.

A relatively heavy reliance on the U.S. consumer in Ontario and Quebec means the near term will be tough for those provinces. Supported by relatively bright prospects for the energy sector, Alberta, Newfoundland and Nova Scotia will lead the provinces in growth.