The Canadian economy is already showing signs of distress from the U.S. economic downturn, and will continue to feel its affect throughout 2008 and 2009, according to a report published today by TD Economics.

“Canadians would be best advised to buckle up for the ride,” says Don Drummond, chief economist.

The path of the Canadian economy will be greatly influenced by how the shocks surrounding oil, the credit crunch and the plunging housing market evolve in the United States.

TD Economics believes the U.S. economy will not experience the snap-back that typically follows an economic downturn. Rather, the number and severity of the shocks occurring simultaneously in the economy argue for an extended period of economic weakness.

The greatest forecasting uncertainty centers around the credit crunch, for which there is little historical precedence. TD Economics believes the impact from tight credit conditions will linger on the U.S. economy, and weigh down investment and consumer spending intentions through 2009.

Mounting job losses in the U.S. will put downward pressure on household income in the year to come. Meanwhile record deterioration in home prices alongside record oil and gasoline prices makes for a less inviting environment for consumer spending, especially now that the Federal Reserve is showing reluctance to provide any additional monetary stimulus due to inflationary pressures.

“Our belief is that instead of getting the traditional pent-up demand pop in consumer spending that typically follows a downturn, we will see a muted pace of spending through the end of 2009. The non-traditional number and magnitude of economic shocks assaulting the consumer don’t suggest a traditional recovery,” says Drummond.

Canadian exporters will continue to feel the pain from the lingering U.S. economic weakness. Real GDP will expand at a 1.0% pace in 2008 and a 1.8% pace in 2009. Both of these estimates are at the low end of consensus estimates because of a more pessimistic U.S. outlook. Meanwhile, domestic demand growth will gear down in response to the tighter credit conditions and a softer job market.

Drummond notes one critical distinction between Canada and the United States: “Canadians households have one good leg to stand on. They will not have to face deterioration in real estate wealth or a sharp slowdown in income growth. The same cannot be said of their American counterparts.”

Drummond also says that “Although inflationary pressures are the ‘flavour of the month’ worrying financial market participants, we see the continued weakness in the U.S. and Canada containing inflation pressures. Nevertheless, the next move by both central banks will be to hike rates, but only after a long pause.” The Bank of Canada and Federal Reserve are both expected to begin a tightening cycle in the second half of 2009.