The U.S. economy will see a downturn in 2008, especially in the first half of the year. GDP growth for the United States should be about 1% for the year, according to forecasts published today by Desjardins Group.

However, Desjardins economists are soft-pedalling the word recession. “This recession, if it becomes official, should be a small one, not in the least a marked economic contraction over a long period,” said Desjardins Group in a release.

“Global economic growth should slow to around 4% in 2008, compared with over 5% in 2007,” says François Dupuis, vp and chief economist at Desjardins Group.

According to Dupuis, tightening credit conditions as a result of the liquidity crunch are limiting growth by consumer spending and business investment in many nations, particularly in North America, as well as Japan, the United Kingdom and in Continental Europe.

As for Canada’s economy, it is dealing with a sharp contrast. On one hand, domestic demand is very lively. It posted 6.9% growth in the fourth quarter of 2007. On the other, foreign trade is hurting, with real exports down 8.5% in that same quarter, and imports up by 10.9%.

“With the dollar to hold close to parity and a declining U.S. economy, this situation will persist in 2008. The battle between these two components of the economy will result in growth of only 1.3% for 2008, half that recorded in 2007 which stood at 2.7%,” adds Yves St-Maurice, director and deputy chief economist at Desjardins Group.

According to St-Maurice, Ontario will be the province that is most affected by the downturn in U.S. activity. “Its economy is at the mercy of the manufacturing industry, especially the automotive sector, which is going through a period of major restructuring. It is more dependent on international exports than Quebec is, and will not be able to avoid a drop in production in the first two quarters of 2008. Technically, therefore, Ontario will be in a recession in the early part of the year. Quebec will barely escape it, thanks to tax cuts and public spending on infrastructure.”

Yves St-Maurice estimates real GDP growth in Ontario and Québec will be 0.5% and 1.2% respectively in 2008, compared with 2.1% and 2.4% in 2007. The western provinces will dominate Canadian economic activity, posting real GDP growth from 1.7% for Manitoba to 3.0% for Alberta.

“With the ongoing mortgage credit crisis and liquidity crunch, stock market volatility, renewed risk aversion in the financial markets, and a deteriorating worldwide economic climate, monetary easing will continue in 2008 almost worldwide. In the United States, the federal funds rate should drop below the 2% mark by summer whereas, in Canada, the key rate will most probably go below 3%,” says Dupuis.

With this kind of rate spread between the U.S. and Canada, and high prices for commodities, Desjardins expects the loonie to stay close to parity in 2008.

The average price per barrel of oil should settle in at about US$92/barrel in 2008, compared with US$72/barrel in 2007, Desjardins forecasts.

The Dow Jones industrial average and S&P 500 will record gains of less than 2% in 2008, then bounce back by 8% in 2009. Thanks to natural resources, the S&P/TSX composite index will do a little better, with a 3% gain in 2008 and a 10% gain in 2009.

The full version of Desjardins 2008 Economic Forecasts can be viewed on www.desjardins.com.