Canada economists see growth risk in 2nd-half 2010

* See firmer first-half growth, wary on second

* Interest rate rise, fading stimulus spending could drag

* U.S. economic recovery expected to be subpar

* Little risk of double-dip recession

By Jennifer Kwan

TORONTO, Jan 6 (Reuters) - Canada's economy should grow firmly in the first half of 2010 but could slacken later in the year as interest rates rise and the benefits of stimulus spending fade, some of the country's top economists said on Wednesday.

The chief economists at Canada's largest banks warned the recovery is fragile and could falter if governments and central bankers around the world don't strike the right balance in withdrawing extraordinary support provided in the financial crisis.

They said the export-oriented Canadian economy is also vulnerable to any downturn beyond its borders.

"We didn't view this as a made-in-Canada recession so we're not looking at it as a made-in-Canada-only recovery," said Craig Wright, chief economist at Royal Bank of Canada (RY.TO), who forecasts 2.8 percent growth this year.

A Reuters poll of global economists last year forecast the Canadian economy would grow by 2.5 percent in 2010. [ECILT/CA]

While Canada appears to be on the road to recovery, its economic fate is closely tied to U.S. and global growth, and firming commodity prices, Wright said.

The U.S. economy, the destination for three-quarters of Canadian exports, improved in the second half of 2009 largely on the back of stimulative monetary and fiscal policy, and its recovery will be "subpar", said Sherry Cooper, chief economist at BMO Capital Markets (BMO.TO).

The big risks lie with the consumer and the "great concerns with employment". There are also questions about how much the U.S. government can do and how strong the rebound in U.S. housing -- the epicenter of the crisis -- will be, she added.

But the risks aren't big enough to spark a double-dip recession.

"It would take another shock in the system ... in order to warrant that concern of a double dip. I think the pessimists all are overplaying that hand," said Cooper.

Still, Warren Jestin, chief economist at Bank of Nova Scotia (BNS.TO), said Canadians should brace for sluggish growth.

"The reality that will begin to emerge in the second half of the year ... basically boils down to the fact that the developed world ... will be settling into a growth trend that will be very substantially slower than we thought to be normal in the past," Jestin said.

"There's a whole lot of reasons for that. Higher interest rates, fiscal retrenchment, changes in financial regulation, demographics."

Indeed, the first half is probably a good time to buy stocks, said Avery Shenfeld, chief economist at CIBC World Markets (CM.TO). He noted economic growth in the second half could be threatened if central bankers raise rates prematurely, and as the impact of fiscal stimulus wanes and inventory rebuilding ends.

The Bank of Canada promised to hold the overnight rate at a record-low 0.25 percent until the end of June 2010, provided inflation remains contained. But many forecasters expect it to tighten monetary policy soon after. [CA/INT]

Don Drummond, chief economist at Toronto-Dominion Bank (TD.TO), said exit strategies will have to be performed with "surgical precision" so as not to risk keeping rates too low and triggering inflation, or hiking too fast and choking growth.

The comments came after the release of a poll by the Economic Club of Canada/Pollara Strategic Research, which showed Canadians were more optimistic about recovery. More than half believe 2010 will be the year the economy turns around, a big increase from 2009. However, nearly 40 percent said the downturn had no real impact on them.

The results were collected from an online panel of 4,263 respondents, Dec. 6-14, with a margin of error of 1.5 percentage points. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson and Rob Wilson)