Falling exports and rising consumer pessimism are expected to curb economic growth in Canada, according to a report released today by the Conference Board of Canada.

The think-tank has downgraded its growth forecast for the Canadian economy to 1.7% this year, from an earlier projection in the spring of 2.2%.

“Over the last four years, Canada’s economy has been a mix of very strong consumer spending held back by a weak trade sector, a trend that has continued right through the early months of 2008,” says Pedro Antunes, director, national and provincial forecast.

“Luckily for manufacturers, the loonie seems to have stopped riding the coat-tails of rising energy prices. The Canadian dollar is expected to remain relatively stable over 2008 and 2009, just shy of parity with the U.S. greenback. This delinking between rising commodity prices and the value of the loonie is a factor in the Bank of Canada’s decision to stop cutting interest rates.”

Despite healthy growth in consumer spending and employment, Canada’s real gross domestic product (GDP) registered a surprising decline in the first quarter of 2008. A slowdown in U.S. demand for Canadian goods-especially autos-was the major reason for the negative first quarter.

Canadian households seemed oblivious to the troubles associated the U.S. slowdown early in 2008, but signs of malaise in the domestic economy are starting to appear. Employment gains are expected to slow, and new fiscal stimulus packages-especially federal and provincial tax cuts-are drying up. According to the Conference Board’s Index of Consumer Confidence for June, concern about high gasoline prices and the economic outlook have sharply reduced consumer confidence.

In the United States, the repercussions of the sub-prime mortgage collapse, falling employment and rising inflation have sharply reduced consumer confidence and growth in household spending. The current outlook calls for weak growth in consumer spending over the rest of 2008 and into 2009. What will keep the economy from experiencing an outright recession is strength in the export sector of the economy, a result of the weak U.S. dollar and solid growth in many of the world’s emerging markets. In addition, government rebate cheques and low interest rates will ensure that consumer spending does not drift into negative territory as has been the case in past economic downturns.

While modest, growth in real U.S. household spending coupled with a stable currency will provide some relief to Canada’s export sector next year. An improving trade performance along with ongoing strength in Canada’s domestic economy should help real GDP growth accelerate to 2.7% in 2009.