US recession to hit Canada hardest

The U.S. economy is already in recession and that will cause a slowdown in the Canada in the first half of this year, BMO Capital Markets said today in its forecast for the year ahead.

Photo: US recession to hit Canada hardest

BMO economists aren't predicting a recession for Canada but expect the economy will grind to a halt by the second quarter before picking up momentum again in the second half. Growth for the whole year in Canada is expected to come in at 1.4 per cent compared to 2.6 per cent last year, Reuters reports.

The Canadian economy soared last year on a high-flying loonie and strong commodity prices while the U.S. economy sagged, and many economists now say the States is either in a recession or perilously close to one, for the first time since 2001.

The U.S. economy has been hammered by the credit crunch spawned by the collapse of the country's subprime mortgage sector and big writedowns in related securities, which reached its peak last August.

The Conference Board of Canada this week predicted real gross domestic product in the U.S. would grow by only 2.1 per cent this year, trailing Canada's expected growth of 2.8 per cent in 2008.

The slowdown prompted U.S. President George W. Bush to outline a plan Friday of about US$145 billion worth of tax relief to stimulate the economy.

But there are positives amid all the doom and gloom, said Doug Porter, deputy chief economist with BMO Capital Markets.

U.S. core inflation remains relatively low, he said, giving the U.S. Federal Reserve room to aggressively cut interest rates if it needs to.

"There's room for Washington to cut taxes or to increase spending," Porter said. "It's not as if policy makers' hands are tied."

But unlike the Fed, Canada's central bank may not feel the same urgency next week to trim its key lending rate as it tries to strike a balance between tempering an overheated economy and staving off a downturn.

The Bank of Canada last month cut its interest rate by a quarter point as expectations for the economy worsened.

The bank had raised its overnight rate to 4.5 per cent last July -- before the loonie reached parity with the greenback in September en route to a record US$1.10 in November -- to rein in Canada's booming economy.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have warned of an expected slowdown in the Canadian economy, signalling any major new tax cuts or spending programs in future budgets are unlikely.

Talk of a U.S. recession's impact on Canada has some north of the border worried about job losses, particularly within the manufacturing sector in Ontario and Quebec.

A U.S. recession would pinch Canada -- in particular the manufacturing sector -- since most of its exports of lumber, autos, machinery and petrochemicals are destined for the States, The Canadian Press reports.

Source: agencies