RBC Financial Group has revised its oil price estimates and economic growth forecasts for Canada higher.

“The latest fundamentals for oil have prompted us to revise our oil price forecast upward,” it reports. “Strong demand from emerging market economies (especially China and India) and a lingering geopolitical risk premium combined with only modest increases in supply will see the price of oil average US$58 a barrel in 2005 and US$57 a barrel in 2006.”

RBC adds that its preliminary estimates of economic growth in Canada for 2006 have also been revised upward due mostly to high energy prices. “We raised our estimates of investment in machinery and equipment to account for stronger corporate profits in 2006, primarily as a result of high energy prices. The domestic economy remains strong and the latest improvement seen in the merchandise trade numbers suggest that the economy is operating in a state of low excess capacity,” it says. “Our preliminary estimates of real GDP growth in Canada are 2.9% this year and 3.4% in 2006.”

Its interest rate forecast is unchanged with its 2005 year-end target at 3.25% and 2006 yearend at 4.00%. However, it’s lowering its Canadian dollar forecast through 2006. “We now expect the Canadian dollar to end 2005 at 85.5¢ U.S. and end 2006 at 82¢ U.S.”

As for the U.S., RBC’s macro forecast has been adjusted “to reflect the damages and reconstruction as a result of the battering of a nasty hurricane season, the rise in energy prices and the corresponding squeeze on profit margins coming from reduced pricing power of businesses.”

“These impacts are largely expected to be temporary, taking some growth away in 2005 and adding some in 2006,” it explains. “Our preliminary forecast has real growth in the U.S. economy of 3.4% in 2005 and 3.2% in 2006, with core inflation reaching just above 3% by the end of 2006. Our previous forecast had 3.7% in 2005 and 3.1% in 2006 and a similar forecast for core inflation given only a minor change in the output gap.”

“We continue to expect that the Fed funds rate will reach 4.25% by the end of this year and remain at that level through 2006,” it says. “The yield on 10-year Treasuries is expected to finish 2005 at 4.75%, peak at 5.00% and move steadily lower to reach 4.75% by the end of 2006.”