The Bank of Canada lowered its growth forecast for the Canadian economy on Thursday but indicated that a recession will be avoided.
In 2008, pressured by a weakening U.S. economy and a tightening of credit conditions in industrialized countries, Canada's gross domestic product is forecasted to only expand by 1.8 per cent.
The bank had previously predicted a growth of 2.3 per cent.
In the first quarter of 2008, growth is expected to be only 0.6 per cent (at annualized rates). But in the second quarter it will grow to 2.0 per cent and in the second half of 2008 it should reach 2.3 per cent.
As a result, a recession -- generally defined as two straight quarters of decline in GDP -- will likely be avoided.
"And as the weather gets colder again, Americans need our heating oil and they need our natural gas to heat their homes as well," BNN's Michael Hainsworth told Â鶹´«Ã½net, "and that will help boost our economy overall."
By 2009, the bank, in its Monetary Policy Report Update released Thursday, forecasts that the Canadian economy should expand by 2.8 per cent.
"This growth profile implies that the economy will move into excess supply in the second quarter of this year, and then return to balance in early 2010," Governor David Dodge said in his final press conference before he retires later this month.
The central bank also stated that the United States will narrowly avoid a recession.
Annual U.S. GDP growth is projected to be 1.5 per cent in 2008 and 2.5 per cent in 2009, said the bank.
Even if a recession may be avoided, Canadian companies appear to be preparing for the impending economic slowdown. A survey by Export Development Canada shows they have very low expectations for the next few months.
"The concern mounts, the sales slow down, and eventually job growth slows down as well," said Peter Hall, vice president of EDC.
Just this week, a big American company told one Canadian business -- Edson Machinery in Hamilton -- it's putting off a major capital investment. Edson executives told Â鶹´«Ã½ they're gearing up for tough times.
"We're not going down without a fight," said Robert Hattin, president of Edson Machinery.
"We've been through three recessions since we've purchased the company."
Export growth
Dodge told reporters that the weakness of the U.S. economy will "lead to additional downward pressure on Canada's export growth."
The bank projects that exports -- mainly delivered to the U.S. -- will shrink in 2008 by 0.1 per cent after having advanced 0.6 per cent in 2007.
In attempt to avert a recession, U.S. President George Bush announced he has a deal -- a stimulus package that was approved by the House leadership -- giving Americans tax cuts.
"I've always believed that allowing people to keep more of their own money and to use it as they see fit is the best way to help our economy grow," Bush said Thursday.
But that package in itself will used borrowed money, and even at $150 billion is miniscule compared to the U.S. economy.
And trouble south of the border is seeping into key economic indicators in Canada. A new survey of exporters, by Export Development Canada, shows deep skepticism about the next few months.
"The concern mounts, the sales slow down, and eventually job growth slows down as well," Peter Hall of Export Development Canada told Â鶹´«Ã½.
Still, Dodge said domestic demand in Canada is expected to remain strong.
On Tuesday, the central bank cut its key rate by one-quarter of a percentage point shortly after the U.S. Federal Reserve slashed its key interest rate.
"Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance, and to return inflation to target over the medium term," Dodge said Thursday.
However, Dodge would not say if a half-point cut could be looming in the future.
"What we try to do, and have tried to do over this whole decade, is to move always in a measured fashion related to our medium-term goal of keeping inflation on target,'' said Dodge.
"And that's why we've tended to move over a period of time in relatively small increments, because it gives us a chance then to adjust or adapt to changes which we don't foresee, which come along.''
Meanwhile, core inflation -- which excludes the most unstable prices -- is projected to fall below 1.5 per cent by the middle of 2008 before it returns to 2 per cent by the end of 2009.
"This reflects a price-level adjustment related to increased competitive pressures in the retail sector stemming from the level of the Canadian dollar, as well as the recent reduction in the GST," said Dodge.
"Excluding the impact of the GST reduction, total CPI inflation is projected to average close to the 2 per cent target throughout 2008 and 2009."
With a report from CTV's Grahame Richardson and files from The Canadian Press
