Despite signs of stress from the war in Iraq and the outbreak of SARS, the Canadian economy should continue to see strong growth this year and next, RBC Financial Group says.

In a report Thursday, Craig Wright, vice-president and chief economist of RBC Financial Group, says the bank is forecasting steady continuing GDP growth rates of 3.4% for this year and 3.5% for 2004. The Canadian economy was one of the strongest in the developed world in 2002 with real GDP growing by 3.4%.

The optimistic outlook for Canada contrasts greatly with the situation facing economies overseas and ongoing challenges facing the U.S. The bank says the U.S. will, once again, have to lead the world economy out of its lethargy. “We expect U.S. real GDP to grow 2.8% in 2003 before accelerating to a 3.6% pace next year,” Wright says.

Wright says while there are certainly risks to watch and caution is warranted, “Canada’s economic growth is still expected to remain firm in 2003 as domestic demand remains strong.”

Three factors are driving Canada’s continuing economic strength: consumer spending, extraordinary employment growth and a deep pool of pent-up demand formed during the leaner years of the mid-1990s. RBC expects pent-up demand to remain a key source of strength in 2003 as Canadian consumers continue to pursue home ownership aspirations and replace an aging stock of vehicles.

RBC says the Bank of Canada will continue to raise interest rates throughout the remainder of 2003 to more sustainable levels, bringing the overnight rate around the 4.5% mark by yearend. In contrast, the U.S. Fed funds rate is expected to remain well behind at 1.25%.

“From the end of 2002 to mid-March, the Canadian dollar appreciated just over 6% against the U.S. dollar and it looks like this appreciation will continue in the medium-term,” says Wright. “We expect the Canadian dollar to reach US68.5¢ by the end of the year and reach the US70¢ mark by the end of 2004.”

While the RBC forecast expects Canadian growth this year to be on par with last year, there are a number of risks; in particular, concerns emanating from today’s depressed confidence levels related to the war in Iraq and Severe Acute Respiratory Syndrome.

RBC notes a less-than-positive outlook for other economies. The United Kingdom’s once healthy economy is starting to buckle under the pressure of sagging world and domestic demand. The two strongest contributing factors to this situation are a decline in trade coupled with a continuing decline in consumer spending. The U.K.’s ability to withstand the global slowdown seems to be diminishing and could worsen if global economic activity does not recover in the second half of 2003.

Meanwhile, continental European economies are experiencing weak growth that appears to be slipping even further away from recovery. This combined with geopolitical events is producing a sense of discomfort that threatens to smother any vigour in domestic European activity.

In the Far East, Japan ended 2002 with stronger than expected growth, with real GDP increasing by 2.2%. However, the road to recovery is decidedly uphill as recent data suggests the consumer side may have reached bottom with record-high unemployment and stagnant income trends spelling continued lax spending.