The slowdown in the Canadian economy will likely be deeper and longer than previously thought, suggests Morgan Stanley in a research note published today.

“The recession in the United States, coupled with weaker growth elsewhere, will likely mean that the drag coming from exports will persist for longer than expected,” it said. “In addition, continued pressures in the financing market have increased the cost of borrowing for corporations and consumers, while some confidence effects will moderate domestic demand from the current strong level going forward.”

Overall, the Canadian economy should grow by 1.2% in 2008 and 1.9% in 2009, it says, lowering its forecasts from 1.7% and 2.6% previously.

With slower growth, continued financial market frictions and low inflation, the Bank of Canada will likely continue to cut rates aggressively, the firm predicts. It expects a 50 basis point cut at the April 22 meeting.

It also warns that, over the medium term, there’s some risk that Canadian dollar will head lower against the U.S. dollar, as the greenback recovers and commodity prices weaken.

“This depreciation of the Canadian dollar and lower commodity prices would have diverse economic impacts. On the upside, a weaker currency could help to stimulate exports and restrain imports, moderating the drag to the economy coming from the external sector. On the downside, weaker commodity prices would reverse part of the terms-of-trade gains Canada has enjoyed over the past years, and this could dampen income growth and consumer spending in Canada if the move is sustained for a period of time,” it adds.