Canada’s economic growth is improving as the economy recovers from one-off shocks, and the pick-up in U.S. growth continues, according to the latest economic forecast from RBC Financial Group.

“Canada’s economy has been shaken by a series of unforeseen shocks this year, but growth is due to pick up as we move into 2004,” said Craig Wright, vice president and chief economist, RBC Financial Group, in a news release.

“The rise of the Canadian dollar and a weak U.S. economy earlier this year have hurt Canada’s trade balance, but a reprieve will come alongside strengthening U.S. domestic demand.”

According to the RBC report, low interest rates and fading shocks will help the Canadian economy going forward. Rising profits and diminishing excess capacity point to continued support from business investment.

The bank says some risks remain on the horizon for Canada’s economy with the inventory-to-sales ratio at its highest level since 1999. Shedding excess inventories is expected to exert some drag on overall growth as the economy heads into 2004 allowing U.S. economic growth to edge past Canada’s this year and next.

RBC forecasts Canadian real economic growth will come in at 2.1% in 2003 and 3.5% in 2004, compared to forecasts of 2.7% and 3.9% in the United States, respectively.

Strong economic growth in the final two quarters of 2003 will ensure the U.S. economy carries positive momentum into 2004. Business conditions continue to improve in the U.S.: profits are up, inventories have been reduced, and much of the investment overhang created by the late 1990s investment boom has been eliminated.

RBC expects both the Bank of Canada and U.S. Federal Reserve to be on the sidelines for coming months in a bid to shore-up labour markets. Low and stabilizing inflation suggests that both the U.S. Fed and the Bank of Canada are unlikely to raise rates until late next year.

“While the Canadian dollar has recently given up some ground against the U.S. dollar, it still remains stronger than at any point in the past five years,” said Wright. RBC forecasts the Canadian dollar climbing to the US77.5¢ mark by the end of 2004.

A complete copy of the forecast is available at http://www.rbc.com/economics/market/pdf/fcst.pdf.