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TORONTO (Reuters) - The Canadian economy is at a risk of falling into a recession as a lofty domestic currency, a weak U.S. economy and stronger international competition take its toll, Desjardins Group said on Thursday.
After four straight months of pullbacks, Desjardins Group economists said the economy is now vulnerable to a recession, generally defined as two consecutive quarters of a decline in a country's gross domestic product.
The combination of a high Canadian dollar, a stagnant U.S. economy and stronger international competition have combined to make foreign trade an Achilles' heel for the Canadian economy, the economists said in their forecast.
This impact is being felt the hardest in Ontario, which Desjardins said is already in a "slight" recession given its overexposure to the economic problems facing U.S. automakers.
Desjardins said the Canadian economy will record a meager 1 percent growth in 2008 and 1.8 percent in 2009.
Canadian Finance Minister Jim Flaherty said recently that Canada is not headed for a recession and that the country's economic fundamentals are quite strong. His comments followed data that showed the domestic economy had its first quarterly contraction in five years.
And just as the financial crisis that has plagued markets for months has become calmer, Desjardins said concerns about inflation will be enough to keep most central banks from hiking interest rates anytime soon.
"Given the fear of seeing inflation become anchored in the economy, and the risk that inflation expectations could go off on a lasting upward tangent, at central banks, the overall watchword is to not pour oil on the fire by lowering interest rates," Desjardins said.
Desjardins said it expects the Bank of Canada to keep its key rate steady at 3.00 percent through 2008 and then raise it by 25 basis points in the second, third and fourth quarters of 2009, bringing the rate to 4.00 percent by the end of 2009.
Reporting by Frank Pingue; Editing by Frank McGurty