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OTTAWA - Canada's national economy got a mild vote of confidence from two chartered banks Thursday as they forecast moderate growth this year and next, but a rougher ride ahead for Ontario's industrial sector, battered by high fuel prices, a rising dollar and more job cuts in the struggling automotive industry.

The Royal Bank said Canada will bounce back from a surprising first-quarter retreat to record a 1.4 per cent rate of growth this year and 2.5 per cent next, a little rosier than a BMO Capital Markets outlook for one per cent growth this year and 2.2 per cent next year.

But both banks said central Canada, and particularly Ontario, will continue to face stiff headwinds as a result of the strong dollar, weak U.S. demand for exports, particularly autos, and high energy prices.

The banks' economic reports came as 2,000 auto parts workers at 11 Toronto-area plants lost their jobs Thursday in a restructuring of parts maker Progressive Moulded Products Ltd.

Those layoffs came a few weeks after major cuts at General Motors Canada, which is closing its Oshawa, Ont. truck plant next year, wiping out 2,600 industrial jobs in the automotive belt of southern Ontario.

The forecasts also came on the same day the Ontario Finance Ministry announced that the province's economy shrank by 0.3 per cent during the first three months of 2008, or 1.4 per cent on an annualized basis.

In contrast, Statistics Canada has reported that the national economy as a whole shrank by 0.1 per cent in the first quarter or 0.3 per cent on an annualized basis.

The bank reports suggest the Canadian economy will escape recession, but that the high prices for oil, minerals, grain and other commodities that have propped up Alberta, Saskatchewan and other western provinces in recent years will continue to squeeze drivers, shoppers and auto workers in central Canada.

BMO senior economist Michael Gregory said his bank believes Ontario will only manage a minuscule 0.2 per cent annualized increase in 2008, just barely above recessionary levels.

"It's like angels dancing on the head of a pin whether you have a technical recession or not," he said.

"The fact of the matter is the economy is weak, it is probably growing far below the underlying growth in the population and therefore GDP per capita on a provincial level is probably shrinking. It's going to be dire, but it could be worse."

Despite the weakness in manufacturing, however, the rest of the economy appears to be holding up, both bank reports said. High commodity prices, especially oil, are helping pump wealth into the country and underpinning the services sector, housing, employment and consumer spending.

"I'm nervously optimistic," said the Royal Bank's chief economist Craig Wright.

"We're optimistic things will get better as we move forward but we're nervous that there's a lot of things that could still go wrong. In the U.S., we continue to see false starts in the economy. We thought the worst of the financial woes were behind the U.S. economy in March and we've seen a bit of a setback there. And oil prices are consistently surprising in terms of how high they can go and how long they can stay at these levels."

Both bank forecasts are roughly in line with the Bank of Canada's most recent projection in April of a 1.4 per cent economic advance this year and 2.4 per cent growth in 2009.

The Canadian dollar is seen coming down from its parity perch as oil prices moderate, falling to 94 cents US by the end of the year and to 89 cents by the end of 2009, says the RBC report.

The reports, while far from confident endorsements of economic strength, are calmer in tone than the hand-wringing that followed the shocking news of the first quarter's 0.3 per cent GDP retreat.

Wright said the first-quarter number was an anomaly and won't be repeated.

"Growth prospects for the remainder of the year are brighter," he writes. "The inventory correction has passed, financial market pressures appear to be easing, and the high level of commodity prices is expected to produce stronger growth rates during the remaining three quarters of the year."

High commodity prices have boosted the Canadian dollar and undermined central Canada's manufacturing base, the report notes, but it adds that commodities represent 45 per cent of total Canadian exports.

And higher commodities prices for everything from wheat and coal to potash and minerals have been largely responsible for boosting wealth among Canadians. During the past five years, Canada's gross domestic income has outstripped real gross domestic product growth by an average of 1.2 percentage points, the report says.

One economic fundamental that remains strong in Canada is job creation. The economy has continued to pump out an average of 26,000 jobs per month so far into 2008, as opposed to the U.S., which has shed about 65,000 jobs a month.

Thursday, the U.S. Labour Department reported employers cut another 62,000 from payrolls in June, the sixth straight month of losses.

Wright said the June job losses were consistent with a U.S. economy that is struggling, but not in recession. "I would be more concerned if it was a triple-digit decline and we haven't seen that yet."

Despite the boost to U.S. consumers from the recent issuance of tax rebate cheques, the Royal Bank still sees Canada's economy outperforming the U.S. in the next three quarters and in 2009.

Both forecasts, however, point to the schizophrenic nature of Canada's mild recovery as record oil prices boost western fortunes while punishing manufacturing-heavy central Canada. 17:36ET 03-07-08