Close ties with the United States will hurt the Canadian economy in the year to come, but Canada will ultimately avoid a recession, Paul M. Darby, deputy chief economist with the Conference Board of Canada, said on Wednesday.

The Conference Board projects GDP growth of 0.8% in Canada this year, and 2.2% in 2009, Darby said at the Conference Board’s 2008 Business Outlook Briefing in Toronto.

“We’ll come through relatively unscathed compared to some other countries,” Darby said, noting that the main hits to the Canadian economy will come from trade and exposure to the world economy. “Fundamentals in Canada are so sound that we’re really just dealing with the sideswipes.”

Darby pointed to such fundamentals as strong growth in government spending, which is estimated at 4% in 2008 and nearly 3% in 2009, as helping Canada to avoid a recession. In addition, pre-tax corporate profit comprised 17.2% of net domestic income in the second quarter of 2008 — a good sign, according to Darby.

Despite strong fundamentals, the Canadian economy will continue to experience weaker demand for exports, Darby said. Real net exports are expected to fall by $34 billion, or 2.5% of real GDP in 2008.

“What’s really been hurting Canada clearly is the export side,” Darby said.

Softer commodity prices will also remove some key support from Canada’s economy as global demand slows. But continued demand from emerging economies should help the price of oil rise to about US$110 next year, according to Darby.

Another concern for the Canadian economy is business investment, which has begun to weaken in the past two years. The Conference Board expects real business investment growth to be slightly higher than 2% in 2008, and 3.3% in 2009. This compares to rates of about 12% and 10% in 2005 and 2006, respectively.

“It’s very worrisome,” Darby said. Contributing factors have included a slower pace of growth in the oilsands, and a struggling manufacturing sector that has led to significantly less investment in non-energy machinery and equipment. Investment growth in this area is forecast to be just 0.6% in 2009, which puts at risk productivity growth in Canada, Darby said.

“It does start to raise questions about the extent of competitiveness in Canadian manufacturing as we go forward.”

Also beginning to hamper investment are challenges getting loans, which Darby expects to become especially difficult for businesses in 2009.

“That’s one of the biggest factors,” Darby said. “If banks aren’t lending, it’s makes it harder to invest and if you’re not investing, it makes it harder to grow businesses.”

Canada’s labour market has not yet showed signs of being impacted by an economic downturn, Darby said, but this is set to change. The Conference Board expects employment growth to slow to 1.4% in 2008 and 0.7% in 2009, from about 2.4% in 2007.

But despite slower growth, Darby said these numbers do not indicate a pending recession. “This is clearly no disaster.”

All factors playing in, 2009 is set to be a tougher year for retailers than the past five years, with consumer spending forecast to grow by 2.7% next year, down from roughly 4% in 2008.

Even if the U.S. economy fails to improve as a result of government’s rescue package and falls into a recession, the Canadian economy would experience lower interest rates and a lower Canadian dollar, which would mitigate the impacts of such a downturn, Darby said.

Across the country, Saskatchewan is expected to lead economic growth next year with real GDP growth of about 3.6%, according to Pedro Antunes, director of national and provincial forecasting for the Conference Board of Canada. He noted that in the past two quarters, Saskatchewan has been the province to receive the most interprovincial migrants thanks to its strong resource sector.

Alberta has shown surprisingly weak economic growth in 2008 due to a substantial drop in drilling activity. But Antunes said the reprieve is only temporary: “It’s not over for Alberta,” he said, noting that the province’s domestic economy is still very strong. The Conference Board expects GDP growth of more than 3% in 2009 in Alberta, up from 1.5% this year.

Ontario’s economy, which is very close to hitting a recession, is expected to grow by just 0.2% this year. Weaker government spending and weaker employment will continue to hurt the economy moving forward, but with exports expected to improve next year, GDP growth is projected to rise to 1.5%, Antunes said.