TORONTO - The Royal Bank of Canada predicts the Canadian economy will grow by 2.1 per cent this year, and that the central bank will gradually raise interest rates next year.

RBC's (TSX:RY) latest Economic and Financial Market Outlook says accommodative monetary policy, continued business spending, supportive labour market conditions and an improving trade balance will lay the foundation for the growth.

The forecast, released early Monday, says lingering downside risks will diminish in the months ahead and clear the way for the Bank of Canada to gradually begin raising interest rates next year.

The bank's outlook on inflation remains benign, as the economy is still growing at a rate close to its long-run potential.

The new forecast notes that Canada's solid economic fundamentals, elevated commodity prices and growing expectations of higher interest rates in 2013 drove the Canadian dollar above parity this quarter.

It adds that even some volatility in commodity prices failed to discourage foreign investment in Canadian assets, as $90 billion of Canadian portfolio securities were bought by foreign investors in the 12 months ending June 2012.

The bank report says demand for household credit slowed significantly during the quarter in response to policy-makers' continued warnings about heavy debt loads.

The RBC expects Western Canada to dominate the growth rankings, with Alberta's economy growing by 3.8 per cent this year — the fastest rate in Canada — and by 3.6 per cent next year.

The bank predicts Ontario's economy will grow at 2.2 per cent this year, compared to 1.9 per cent in 2011. But that is still well short of the 3.4 per cent 10-year average preceding the recession.

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  • 20: Australia

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 19: South Korea

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 18: Saudi Arabia

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 17: Belgium

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 16: Austria

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 15: Norway

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 14: Canada

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 13: Taiwan

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 12: Denmark

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 11: Qatar

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 10: Japan

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 9: Hong Kong

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 8: United Kingdom

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 7: United States

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 6: Germany

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 5: Netherlands

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 4: Sweden

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 3: Finland

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 2: Singapore

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>

  • 1: Switzerland

    Source: <a href="http://www3.weforum.org/docs/CSI/2012-13/GCR_Rankings_2012-13.pdf" target="_hplink">World Economic Forum</a>