October 23, 2008 / 2:46 PM / 9 years ago

Canada seen teetering on brink of recession

OTTAWA (Reuters) - The global financial crisis, a U.S. recession and falling commodity prices will bring Canada to the brink of a recession in late 2008 and early 2009, the Bank of Canada said on Thursday.

<p>Canadian currency in the form of twenty dollar bills are displayed in this posed photograph in Toronto, October 22, 2008.REUTERS/Mark Blinch</p>

“Three major interrelated global developments are having a profound impact on the Canadian economy and making the outlook more uncertain than it was at the time of the July Monetary Policy Report,” the bank said.

In its quarterly report, the central bank projected the economy would shrink 0.4 percent in the fourth quarter of this year and would record zero growth in the first quarter of 2009. The popular definition of a recession is two consecutive quarters of economic contraction.

The bank had previously estimated 1.8 percent growth in the fourth-quarter and 2.8 percent expansion in the first part of next year.

In its updated forecast, it saw no recovery until mid-2009, with the economy growing 0.8 percent in the second quarter and 2.2 percent in the second half of the year. Annual growth estimates for 2008 and 2009 are 0.6 percent each and 3.4 percent for 2010.

The central bank fleshed out details of the bleak projections it made on Tuesday, when it cut its key interest rate by a quarter point to 2.25 percent and downgraded its annual growth outlook.

It believes the U.S. is already in recession and will be until the first quarter of next year. It sees global growth of less than 3 percent, which most economists consider recessionary.

But Canada, despite its reliance on trade with the United States, will fare slightly better because it went into the crisis with a stronger housing market, stronger consumer spending and healthier banks than many other advanced economies, the central bank said.

Still, access to credit has become “severely impaired” and pricing has tightened for banks and non-bank firms alike, it said. Borrowing has also become more costly for households but availability does not appear to be restricted, it said.

“The deleveraging of the global financial system will take some time to complete, and will involve a larger and more persistent tightening of credit conditions than was assumed in July,” it said.

The bank assumes the Canadian dollar to average about 85 U.S. cents, down from 98 U.S. cents in July, with oil prices in a range of $81 to $88 a barrel, based on recent futures prices.

Reporting by Louise Egan; editing by Rob Wilson

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