Western Canada will continue to lead the Canadian economic parade in 2006, maintaining the trend of the last few years, according to the BMO Financial Group Economics Department’s Provincial Outlook report issued today.

“Most of the strength found in the West, as well as in Newfoundland and Labrador, can be attributed to high resource prices,” said Rick Egelton, senior vp and chief economist, BMO Financial Group. “At the same time, these prices are creating a drag on growth in both Ontario and Quebec.”

Alberta will lead the way with growth of 5.2% this year, and there will be robust economic expansion in B.C., Saskatchewan and Manitoba. Meanwhile, Newfoundland and Labrador will post a 5% gain, an impressive figure given its growth of 0.4% in 2005.

Nationally, Canada’s performance in 2006 is expected to be slightly stronger than in 2005, with growth estimated at 3.1% compared to last year’s 2.9%. Investment is expected to be a key contributor to growth, while the impact of the strong Canadian dollar will be tempered by still high commodity prices. Earlier interest rate tightening is expected to have more of a dampening impact on consumption this year.

“Going forward, the restraint from the loonie will ease, though the impact of higher interest rates will intensify,” said Egelton. “Meanwhile, investment will continue to be an important source of growth. In total, GDP is expected to rise 3.1% in 2007 and 3% on average over the period 2008-2010.”

On the employment side, the pace of hiring has picked up from 1.4% in 2005 to 2% in 2006, which will contribute to a drop in the unemployment rate to 6.3% this year from 6.8% in 2005. “However, we don’t expect the upward trend in employment growth to continue,” stated Egelton. “A slower pace of employment growth in 2007 and beyond reflects the fact that firms are increasingly responding to rising demand by adding capital rather than new workers. This will contribute to an improvement in productivity in the Canadian economy.”

“We now expect housing starts in 2006 to be about the same as in 2005,” said Egelton. “Nonetheless, higher interest rates will eventually move housing starts lower – a development which we now expect to happen starting in 2007.”

As for interest rates, BMO expects that the Bank of Canada will hold the overnight rate steady at 4.25% for the foreseeable future.

The bank forecasts that the Canadian dollar will continue to climb well into next year. “We expect the currency to average 89 cents U.S. for the year as a whole, then rise to 91 cents U.S. in 2007 on general weakness in the greenback, before easing off to 90 cents U.S. in 2008,” said Egelton.

The full Provincial Outlook report is available at www.bmo.com/economic.