12/07/2011 10:54 EST | Updated 02/06/2012 05:12 EST

The two-tiered economy: Natural resources fuels western expansion

OTTAWA - Natural resource riches are re-emerging as the major engine of economic activity in Canada, splitting the country between the oil-rich provinces and everyone else, a new report suggests.

The Bank of Montreal says the provinces of Alberta and Saskatchewan will beat the national rate of growth both this year and next by a wide margin, while other provinces' growth won't fare as well over the two-year period.

Newfoundland and Labrador, whose offshore oil production has begun to moderate, is expected to show strong growth again this year after leading the country in 2010, but then see growth drop off dramatically next year.

Ontario, Quebec and the three Maritime provinces, meanwhile, will likely struggle with growth below the national growth rate of 2.3 per cent this year and 2.0 next year as their economies are weighed down by government austerity and export challenges due to the high dollar.

BMO economist Robert Kavcic said the recent recession caused a "hiccup" in the West's ascendancy as an economic powerhouse because commodity prices tumbled and demand softened. But the previous trend has reasserted itself.

"We're getting back to what we saw in the middle part of the 2000s, which is that provinces with commodity resources significantly outperform provinces that just don't have them," Kavcic said.

The lure of resource wealth is a self-enforcing mechanism, he adds. High commodity prices boosts the value of the dollar, which further depresses provinces that depend on manufactured exports, such as Ontario and Quebec.

As well, resource rich provinces create a healthy tax base for governments, while others are forced to impose austerity to bring down high deficits, further dampening economic activity.

"It's all related. What you see at times likes this is the population move from east to west, and it's starting again. The first half of this year we've seen the highest rate of in-migration to Alberta since 2006 or 2007," Kavcic said.

The BMO report coincides with a recent Conference Board outlook that also predicted Alberta and Saskatchewan would lead the rest of Canada in growth over the next few years.

On average, Canada's economy is expected to continue with moderate growth in 2012