Canada’s western provinces will benefit from higher prices for commodities, while Central Canada will fare less favourably as it faces mainly higher materials costs, according to a report on provincial economies released today by economists at Bank of Montreal.

The concentration of manufacturing in the Ontario and Quebec will also restrain growth this year as this sector continues to cope with a high value of the Canadian dollar. However, the adverse impact of the past rise in the Canadian dollar on net export growth should largely dissipate by 2006 allowing real output growth in the two provinces to bounce back.

BMO economists say the Bank of Canada is expected to resume interest rate hikes in the fall. The overnight rate is expected to rise from 2.5% currently to an eventual peak in 2007 of 4.5%. All Canadian provinces are expected to benefit from growth in the U.S. remaining at above-potential rates this year and next.

BMO says the strongest provincial growth in 2005 and 2006 will be in the West, where Alberta will lead the way with 4% growth in both years and British Columbia’s economy will expand by 3.5% this year and 3.8% in 2006.

Although the Atlantic provinces will see somewhat slower growth, all will record an improvement from their performances in 2004.

The other provincial economies will grow at rates close to the national average of 2.9% this year.

“To some extent the story is similar to what we saw in 2004,” says Rick Egelton, chief economist, BMO Financial Group. “Provinces with the most dependence on commodities will see the strongest growth this year; provinces most affected by the strong Canadian dollar — notably Ontario and Québec — will continue to see growth constrained.”

BMO anticipates that commodity prices will remain high but will moderate over the next few years. In particular, oil is expected to average US$51 per barrel over the whole of 2005 — up from US$41.54 last year — but ease to an average of US$44 per barrel in 2006.

At the same time, the forecast sees the Canadian dollar averaging somewhere between US80.5¢ and US81.2¢ over the years of the forecast.

Another noteworthy trend, according to BMO, is the gradual decline in home-building activity, which started in the middle of 2004 for most provinces. Total housing starts are expected to fall from 233,000 units last year to 210,000 units this year and eventually to an average of 175,000 units in the 2007 to 2009 period.

In 2006, Newfoundland and Labrador wiill lead rovincial growth with a full year of production from both the White Rose offshore oil project and the Voisey’s Bay nickel development.

Ontario and Quebec will benefit from stronger manufacturing performances as the adjustment to the stronger Canadian dollar will largely be complete.

Most other provinces will see growth rates similar to this year’s.