The Canadian economy will contract by 0.5% this year as it gets dragged into recession by the global economic downturn, according to the latest economic outlook from the Conference Board of Canada.

In its winter outlook, the Conference Board says it expects the Canadian economy to contract for three consecutive quarters in 2009.

“The deepening U.S. recession continues to hurt Canada’s trade sector,” said Pedro Antunes, director of national and provincial forecast at the Conference Board.

Antunes adds that an even more significant factor pulling the Canadian economy into recession is the impact of sharply lower commodity prices on real income.

“Lower resource prices, combined with waning consumer and investor confidence and the bleak U.S. outlook, will bring a recession to Canada in 2009,” he says.

The federal fiscal stimulus, in the form of tax rebates and increased funds for infrastructure, will not prevent this recession, according to the outlook.

It predicts that Canadian business investment and employment will both decline this year.

Specifically, the unemployment rate will surpass 8% by the end of the year as the contraction temporarily reverses Canada’s 14-year trend of tightening labour markets, according to the Conference Board.

With raw material prices not expected to rebound quickly to 2008 levels, both federal and provincial governments are expected to slip into significant fiscal deficits. The governments will be hard-pressed to balance their budgets by the end of the forecast period in 2013, the outlooks says.

Meanwhile, the U.S. economy is experiencing its greatest contraction since the 1930s. The Conference Board’s U.S. outlook projects a 1.7% contraction in real GDP in the United States this year, even with a massive fiscal stimulus package.

“Almost every region, industry, occupation and demographic group in the United States is being affected by the current downturn,” said Kip Beckman, principal research associate. “American household spending, which has been a pillar of global demand in recent years, is forecast to drop by 4% in 2009.”

The Obama Administration’s stimulus package is expected to have a positive effect on the U.S. economy, helping to prevent an extended recession.

The forecast calls for a rebound in growth in the second half of 2010, due to the aggressive monetary policy response by the Federal Reserve and fiscal action by the U.S. government. U.S. real GDP will expand by 2.2% in 2010, according to the Conference Board.

As key U.S. export markets recover, the outlook projects that Canada’s real GDP will rebound to growth of 3.6% in 2010.

IE