Weak economic conditions in the United States and tight credit have pushed Canada into a recession, and the economy will experience no growth next year, according to a new economic and financial market outlook from RBC Economics Research.

The report says Canada’s economy will grow by a mild 0.6% in 2008, down from a previous forecast of 0.9%.

Next year, the combination of falling domestic income growth, tighter credit conditions and a rising debt-to-asset ratio will curb consumer spending activity, according to the outlook. The bank cuts its GDP growth forecast to zero for 2009, down significantly from its previous forecast of 1.5%.

“The economic downturn will undoubtedly be more severe than we previously thought,” the RBC report says.

Still, the recession that Canada will experience will be less severe than that in the United States, since the amount of credit tightening and spread widening was more contained in Canada.

RBC economists expect negative growth for the Canadian economy in the next two quarters, followed by the beginnings of a recovery in the second half of 2009.

The unemployment rate could climb as high as 7.4%, but the bank expects residual support from the improvement in Canada’s terms of trade to limit deterioration in the labour market.

On the currency front, RBC expects the Canadian dollar to continue to feel downward pressure in the months to come, bottoming out during the first half of 2009. During the second half of the year the loonie will rise to US$0.80 and by the end of 2010 it will climb to US$0.87, according to the outlook.

Amid higher borrowing costs and a more challenging financing environment, corporate Canada, will see a period of slower investment spending in 2009,

The Bank of Canada will likely cut interest rates by another 50 basis points to 1% in January, according to RBC, and interest rates will remain low throughout the rest of the year. The bank expects the 10-year Canada bond yield to trade around 2.5% early in 2009, then gradually increase to 3% by year-end. Short-term government yields are forecast to be around 1%, with the two-year rate gradually rising toward 1.75 % by the end of next year.

Among the provinces, Ontario is expected to be hit the hardest, with contractions in GDP in both 2008 and 2009. The economy will shrink by 0.4% in 2008 and 1.4% in 2009, as “consumer and business sentiment sours and is no longer able to offset the drag from the struggling external trade sector that is being exacerbated by the worsening of conditions south of the border.”

The Ontario economy will recover in 2010, as U.S. demand strengthens from fiscal and monetary stimulus.

Newfoundland and Labrador is the only other province expected to see declining growth next year, thanks to further expected declines in offshore oil production.

Growth in Quebec’s economy will also slow significantly, with zero growth expected in 2009, due to weakness in the economies of its trading partners.

Saskatchewan will lead nationwide growth at 2.8% next year, despite commodity prices that will remain lower than 2008 levels next year. Growth in Manitoba will also remain strong, at 1.9% in 2009.

Meanwhile in the United States, RBC expects that real GDP growth to decline by about 1.5% in 2009, followed by a recovery with growth of 2.1% in 2010.

The bank expects a similar trend for the global economy, with more declines in store for the first half of 2009, but good news to follow.

“The combination of accommodative monetary policy and an anticipated narrowing in spreads is expected to be sufficient to put growth back on an improving trend beyond that point, with the global economy likely to be on a firm recovery path in 2010,” the report says.

IE