Canada economy headed for recession, BMO forecasts

Thu Oct 16, 2008 5:37pm EDT
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TORONTO (Reuters) - The Canadian economy will fall into a recession in the first quarter of 2009 as a global financial crisis saps growth, BMO Capital Markets said on Thursday.

Bank of Montreal's report follows a forecast by Bank of Nova Scotia earlier this month that Canada would fall into a recession, usually defined as two straight quarters of economic contraction.

"Canada cannot escape the knock-on damage of not only the U.S. recession, but also the wealth destruction arising from the plunge in our stock market and the slowdown in our housing markets," BMO Chief Economist Sherry Cooper wrote in a note.

BMO expects the Canadian economy, which narrowly avoided a recession earlier in 2008, to contract by 0.7 percent in the fourth quarter and 0.5 percent in the first quarter of 2009.

Cooper said the financial crisis will result in a dramatic slowdown in the United States and elsewhere and that the steep sell-offs on global equity markets reflect that reality.

"Unfortunately, the likelihood of a protracted and deep recession in the U.S. is high, with the rest of the world mirroring the U.S. in varying degrees," wrote Cooper. "Expect recession in Canada."

Bank of Nova Scotia said it expects the Canadian economy to shrink 1.0 percent in the fourth quarter, 1.2 percent in the first quarter of 2009 and 0.5 percent in the second quarter before bouncing back in the third quarter.

A quarterly Reuters survey released on Thursday found that most economists think Canada will steer clear of a recession as domestic demand outweighs the drag from trade.

A report from the Conference Board of Canada released earlier this week said Canada would avoid slipping into a recession as domestic demand helps offset the negative impact of falling commodity prices.

(Reporting by Frank Pingue; Editing by Frank McGurty)