November 3, 2008 / 7:34 PM / in 9 years

Canadian growth outlook dims into 2009, study says

TORONTO (Reuters) - Canada is expected to barely skirt a recession as slumping trade with the United States, softer commodity prices, and tighter credit markets dim its growth outlook into 2009, the Conference Board of Canada said Monday.

<p>A young rugby supporter has his face painted in the Canada national colors during the Hong Kong Sevens rugby tournament in Hong Kong March 30, 2008. REUTERS/Victor Fraile</p>

The independent research association now expects gross domestic product to come in at 0.7 percent this year, and at 1.5 percent in 2009. That compares to an earlier forecast, released October 15, of 0.8 percent growth in 2008, followed by 2.2 percent next year.

The board expects the U.S. economy to slip into recession in the fourth quarter, after registering a negative reading in the prior quarter. A recession is technically defined as two back-to-back negative quarters.

The conference board expects U.S. GDP to squeak out just 0.5 percent growth in 2009, before rebounding in 2010.

Canada sends over three quarters of its exports to the United States.

“Canadian manufacturers will inevitably suffer in 2009 from a weaker outlook for U.S. exports and U.S. domestic demand,” the authors of the report wrote.

Auto production, which makes up the biggest portion of Canada’s manufacturing sector, has dropped off. Auto exports are down 19 percent this year due to weaker U.S. demand and volatile energy prices.

Canada is a net energy exporter and government coffers benefited when oil prices spiked to above $147 a barrel in July. But the prospect of a global recession, and the drop in demand that would accompany it, took the steam out of oil and other commodity prices - cutting into a significant source of government tax revenue.

Natural resources make up around half of Canadian exports.

The report said that as markets stabilize, fundamental factors, such as demand growth from industrializing nations, will regain traction and help most raw material prices recover lost ground.

“Most important is the assumption that oil and other commodity prices will partly recover,” the report said.

It said that if commodity prices were to remain at current levels, then its Raw Materials Price Index could end up posting a 15 percent, rather than 5 percent, downward correction in 2009.

“This would greatly erode Canada’s terms of trade and real income growth, undermining an already weak forecast for domestic demand growth next year.”

The Conference Board forecasts West Texas crude oil to average $90 a barrel in 2009.

Canada cannot count on its domestic economy to spur demand either, the report said.

“Canada’s domestic economy will not escape the implications of tight credit conditions and diving business and consumer confidence.”

Consumer confidence in Canada fell to its lowest point in 26 years in October, according to a recent Conference Board report. Another showed that domestic wage hikes were expected to slow in 2009 as well.

Reporting by John McCrank; editing by Richard Valdmanis

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