Source: The Canadian Press

The Canadian economy’s rocket-like recovery is burning out, falling back into a prolonged period of more modest growth and job creation, a new forecast from the Conference Board predicts.

After annualized growth rates of 4.9% and 6.1% in the last three months of 2009 and first three of 2010, the economy is expected to slow significantly in the second half of this year and into 2011.

The Ottawa-based think-tank says growth will slow to 3.6% when the second quarter results are in, then to 3.3% in the third quarter and finally to 2.9% in the final three months of 2010.

“It’s not a double-dip recession, it’s growth not as strong as in the past,” says economist Pedro Antunes, director of forecasting for the Conference Board.

For the year, the Conference Board expects growth to average 3.6% in 2010 and 2.9% in 2011.

The U.S. Federal Reserve also said Wednesday they have a slightly dimmer view of the U.S. recovery. They downgraded growth for this year two-tenths of a point to between three and 3.5%.

The Fed’s projections coincide with a surprisingly weak June retail sales data coming out of the U.S. Commerce Department, showing consumers slowing spending a further 0.5%, following a 1.1% plunge in May.

Many expect the Bank of Canada to temper its own expectations about the Canadian economy next week, but not so much to dissuade governor Mark Carney from taking interest rates up a quarter-point to 0.75%.

In the last policy review, the Canadian central bank also predicted the economy would slow in the second half of 2010, while average 3.7% for the year.

That number is considered high by many private sector economists, who say recent indicators point to a sharper slowdown.

In April, the latest numbers available, growth came to a standstill, ending seven straight months of advances.

The Conference Board says Canadians should also expect job creation to slow, although it believes the unemployment rate will continue to decline if more slowly from the current 7.9% to 7.8% by the end of 2010 and average 7.4% in 2011.

The pace of recovery so far has surprised many — first quarter growth was the strongest in a decade — and while it has not taken economic activity all the way back to pre-slump levels, it improved the lot of many.

Employment during the first half of this year has risen by 309,000, more than earlier forecasts had projected for the whole of 2010.

New figures from the federal bankruptcy office also show Canadians’ finances have improved significantly, with consumer bankruptcies in April dropping 21.1% compared with the same month last year, while business failures declined 17.8%.

Antunes says the growth spurt was the result of a strong domestic economy boosted by robust consumer spending, government stimulus spending and restocking by companies that drew down inventories during the recession.

But consumers couldn’t continue their spending spree for long, especially with interest rates rising, he said, noting that Canadians have been increasing spending beyond the rate of income growth.

“In terms of sustaining gross domestic product growth going forward, it’s really on the trade side and (business) investment, and that depends on the rest of the world and that’s where we think much of the risk still lies,” Antunes said

The big danger, he said, is if another crisis occurs that saps confidence and undermines world trade and business investment, much like the fall of Lehman Brothers did in 2008.

Prospects from the U.S. remain weak and the European debt crisis has added a volatile unknown into the forecasts, he said.

“We don’t think it will happen, but these risks are real.”

In his forecast, Antunes points out that the projections depend on a “modest” recovery in U.S. household spending.