Economists at Canada’s big five banks are predicting a disappointing year for the Canadian economy in 2004, due largely to the continuing strength of the loonie and the federal government’s fiscal restraint.

“It will be a pretty mediocre year,” says Don Drummond, senior economist at TD Bank Financial Group.

In a presentation hosted by The Economic Club of Toronto this morning, a panel of senior economists forecasted a meagre 2.8% to 3% growth in Canada. One exception comes from RBC Financial Group’s Craig Wright, who puts Canadian growth at 3.5%. Wright cites low interest rates, rising commodity prices and improved access to capital for his generous forecast.

The Canadian dollar is expected to continue to gain momentum in 2004, surpassing US80¢. But whether the Bank of Canada will cut rates to slow down the burgeoning dollar remains to be seen. Tim O’Neill, senior economist at BMO Financial Group, doesn’t expect a rate cut anytime soon, at the earliest in late 2004. Others expect a rate cut of between 50 to 75 basis points early in 2004 to combat further appreciation of the Canadian currency.

Economists are more optimistic about U.S. growth, which is expected to be between 4.5% and 4.8%, with strong performances in equipment and software sectors. The weak U.S. dollar and low interests rates are credited for the outlook, as well as favourable fiscal policies leading into the election year.

But sustainable growth isn’t likely. “The U.S. economy will come in like a lion and go out like a lamb,” says CIBC World Markets economist Avery Shenfeld, adding that consumer spending will likely slow down mid-year and growth will settle at around 3% or lower in the second half of 2004.

The rosy outlook for the U.S. will benefit Canada to some degree, but will be dampened by the strong Canadian dollar, says O’Neill. “Canada will have less reliance on exports and more reliance on domestic spending,” he says.

The panel discussion coincided with The Economic Club of Toronto’s release of its annual survey on Canadians’ economic outlook for 2004. The survey, conducted in December 2003, found that Canadians are more optimistic about the economy than they were one year ago despite the significant challenges imposed by such events the SARS outbreak and the Ontario blackout. Sixty per cent of Canadians predicted either moderate (55%) or strong (5%) economic growth in 2004, and 44% believe the nation is better prepared to handle economic disasters in the coming year.

The results are based on a nationally representative survey of 1,689 Canadians, accurate within +/- 2.4 percentage points, 19 times out of 20.