Canada's economy entering deep recession: OECD

OTTAWA (Reuters) - The Bank of Canada has more room to slash interest rates, the OECD said in a report on Tuesday, forecasting Canada's economy will shrink for three straight quarters as the global crisis bites into domestic spending.

The economy is now in a recession, said the Organization for Economic Co-operation and Development, which predicted gross domestic product would shrink 1.6 percent in the fourth quarter, 1.4 percent in the first quarter of 2009 and 0.3 percent in the second quarter, before returning to growth.

The economy will contract 0.5 percent in 2009, it estimated.

"Excess capacity and lower commodity prices are alleviating inflation pressures, allowing the Bank of Canada to boost its expansionary stance," it said.

The central bank has cut its key overnight lending rate by 225 basis points since December 2007 and has suggested it will ease rates again on December 9.

Domestic demand, until recently the motor of growth in Canada as exports sagged due to the global slowdown, slowed to 2.8 percent growth in the first half of this year. That is almost half the rate of the past few years.

"Indicators point to further weakening in the last half of 2008 as a recession takes hold," it said.

As a result, there will be a net loss of jobs in 2009 and the unemployment rate will rise to 7 percent, the highest since February 2005. The OECD sees the jobless rate peaking at 7.5 percent in 2010.

The federal and provincial governments combined will likely post a deficit in 2009 and 2010, it said, but it called the shortfall "a largely cyclical outcome that is not alarming and leaves room to absorb eventualities, but underlines the need to keep a lid on discretionary expenditure increases."

The OECD predicts a deficit in the current account, amounting to 1.7 percent of GDP in 2009 and 1.4 percent in 2010.

(Reporting by Louise Egan; editing by Rob Wilson)