TORONTO - Yet another report Friday predicted Canada will avoid a recession as the global economy gears down, but the latest statistics showing falling inflation could also affect consumer behaviour and put further brakes on economic growth.
The Conference Board of Canada predicted Friday that the financial and economic turmoil in the United States will limit Canadian economic growth to 0.8 per cent this year, but Canada will avoid a recession - technically two straight quarters of economic shrinkage.
The board survey backs up a Bank of Canada assessment this week that the Canadian economy will tread water this year and next - with negligible growth - before stronger expansion in 2010.
With the economy squeezed and prices for oil, commodities and other products falling, inflation is cooling. That's normally a good thing, but one economist warned it's a trend that can also produce further economic contraction.
"Sometimes in periods of declining prices, it acts as a restraint on the economy as individuals hold off making purchases, anticipating that products are going to cost even less further down the road," explained Paul Ferley, assistant chief economist at RBC.
Statistics Canada reported Friday that annual inflation cooled by 0.1 point to 3.4 per cent in September, just off August's five-year high, beginning what is expected to be a long slide.
Gasoline continued to power the headline rate, while core inflation, excluding volatile food and fuel items, remained tame at 1.7 per cent, below the Bank of Canada's two per cent target.
Gasoline prices have dropped as crude continues to fall on world markets. On Friday, oil prices fell sharply to around US$63 a barrel, less than half where it was in July, amid weakening global demand for crude.
Another economist predicted Canada could experience deflation - a rare phenomenon of declining prices - next year.
"With credit channels around the world impaired and with incomes and wealth facing a further hit, that's not an environment where prices are going to go up for many categories," said Scotiabank economist Derek Holt.
But Ferley said there can also be an upside to slowing price increases.
"With crude oil prices coming off a fair bit, we are managing to get gasoline prices down, so to that extent it is a favourable development," he said.
Slowing inflation will likely prompt the Bank of Canada to cut interest rates again, Ferley said. The central bank has already cut its overnight lending rate by three quarters of a point since the beginning of the month, and Ferley said consumers should expect to see another quarter point cut before the end of the year as the central bank attempts to stimulate the slowing economy.
"With the turmoil that we're seeing in financial markets, at the moment it's suggesting that the high cost of capital is persisting, and that was the factor that pushed the U.S. economy into recession," Ferley said.
"You're going to want to see it reverse to prevent that weakness from deepening further."
The Toronto stock market was down again Friday, losing 206.77 points to 9,124.58 in late morning trading. The index has lost 22 per cent of its value since the beginning of a disastrous month for traders.
Meanwhile, the federal government announced Friday that it posted a $1.7-billion deficit in August. The government is still operating on a $1.2 billion surplus for the fiscal year, but the monthly deficit indicates Ottawa may have difficulty balancing its book this year.
