"Canada's economy softened in the latter half of 2006 with the trade sector as the main culprit; but solid growth is expected to return in 2007," said Craig Wright, vice-president and chief economist, RBC. "The tight labour market, rising incomes and high levels of liquidity in investment portfolios will continue to support consumer spending and offset ongoing adjustments in trade and inventories."

The growth outlook south of the border will show a small decline compared to the strong 2006 levels, with RBC predicting 2.4 per cent growth for the U.S. economy in 2007, compared to 3.3 per cent growth in 2006.

U.S. consumers are likely to pull back a bit in early 2007, but strong employment gains, rising wages and growing overall net wealth will support stronger gains in the second half of 2007, says RBC. Looking ahead growth is expected to jump to 2.9 per cent in 2008.

This could weaken the Canadian dollar to 82.5 U.S. cents in the middle of 2007, but the strong performance expected from Canada in 2008 should boost the currency back to the 87 U.S. cent range. The Canadian dollar reached it highest level of 91 U.S. cents in May 2006.

Expect to see longer-term interest rates rise in the second half of the year, keeping in line with the U.S., says RBC. Rising core inflation in the U.S. is expected to prevent the U.S. Federal Reserve from significantly easing interest rates this year. RBC notes that stronger growth in 2008 should see the Fed shift into rate hike mode with a 50 basis-point increase expected in the second half of the year.