The world economy will grow at its weakest level in 27 years in 2009, but Canada will avoid a deep downturn, according to the National Bank Financial Group.

The bank’s global economic and financial outlook for 2008 and 2009, released on Thursday, predicts global growth of 1.6% next year.

“Even if deleveraging and forced asset sales let up in the months ahead, which is likely, we do not expect the world economy to expand by more than 1.6% in 2009,” said Stefane Marion, chief economist and strategist at National Bank.

In Canada, the bank expects total GDP growth of 0.7% in 2008, and no growth in 2009. While a technical recession “seems inevitable,” the National Bank expects monetary policy and budget stimulus measures from Ottawa to help sustain domestic demand and prevent a recession as severe as the one of the early 1990s.

“This kind of recession happens only if the bottom falls out of domestic demand,” the report says, adding that domestic demand generally only falls during times of restrictive monetary policy, which is currently not the case.

Exports will be the “weak link” in the Canadian economy, falling by 5% to 10% from peak to trough, according to the bank. This weakness could also persist for a longer period than in previous recessions, since the U.S. economy will likely be slow to recover.

The unemployment rate, which is current just over 6%, will peak at 7% next year, according to the outlook.

“There is no reason to think that the overall decrease will be as large as in past recessions,” the report says, noting that corporate profits are still growing in Canada, while they are falling south of the border.

National Bank expects the housing market to continue to slow in 2009, with a 20% drop in housing starts and a 15% drop in home sales.

Across the country, Ontario and Newfoundland are the only two provinces expected to report negative GDP growth next year, at declines of 0.8% and 1.3% respectively. Leading growth will be Saskatchewan, at growth of 2.6%, followed by Manitoba, at 1.4%.

The Canadian dollar will likely continue to hover near its current level, remaining between US78¢ and US82¢ throughout 2009, according to the outlook.

Meanwhile, the report says the United States officially began a consumer-led recession –its first since 1991 — in December 2007. The bank expects the recession to last until mid-2009 — a recessionary period longer than average, at 20 months total, due to the corresponding financial crisis.

Demand in the U.S. will not begin to rebound until the second half of 2009, which could put its economy on track for “moderate growth” in late 2009, but negative growth until then. Real GDP should decline by 0.3% in the United States in 2009, the bank projects.

In addition, the U.S. unemployment rate could climb to 8% or more by the end of 2009.

The downturn in the United States has dragged other countries around the world into recession as well.

“The emerging economies are still overly dependent on the industrialized economies,” commented Yanick Desnoyers, assistant chief economist at the National Bank. “The economic decoupling theory is slowly but surely fizzling out.”

But the National Bank expects liquidity measures by the Federal Reserve and the U.S. Treasury, along with major economic stimulus in next year’s U.S. budget, to help the U.S. and world economies to recover in 2009.

The bank also expects historically low interest rates to persist next year.

As for the financial markets, National Bank holds that the stock markets have already discounted a great deal of bad news, so that downside risks have abated considerably.

“North American equities have now absorbed most of the decline typical of past periods of financial stress and economic contraction,” the report says. It adds that three conditions are necessary for a rebound: stabilization of the U.S. housing market, more realism in consensus earnings forecasts and an abatement of credit risk.

Since equity markets always rebound before the economy — typically two-thirds of the way through a recession — National bank expects stock markets to rebound next year.