Canadian economy set to narrowly miss recession

By Frank Pingue

TORONTO (Reuters) - The Canadian economy should steer clear of a recession as domestic demand will continue to outweigh the drag from trade, but economic growth will be hard to come by, a quarterly Reuters poll showed on Thursday.

The survey of 29 economists, conducted October 8-15, produced a median 2008 growth forecast of 0.6 percent annualized, down from the 1.1 percent predicted in a poll taken three months ago.

The poll, which was conducted after major central banks slashed interest rates in a coordinated global move, also forecast the Canadian economy would neither grow nor contract in the fourth quarter and then expand in every quarter of 2009.

"It is very close to a recession, I would say on the brink of it," said Bodhi Ganguli, economist at Moody's Economy.com in West Chester, Pennsylvania. "There is also the chance that the recession might happen ... say in Q3 and Q4 of this year."

The more bearish forecasts in the survey see the economy contracting by 2.5 percent in the fourth quarter, 2.0 percent in the first quarter of 2009 but see 0.3 percent growth in the second quarter of 2009.

Forecasts were taken before Prime Minister Stephen Harper won reelection with a stronger minority government and called for party unity to tackle financial turbulence.

Canada's gross domestic product (GDP) shrank 0.8 percent in the first quarter of 2008 but managed to avoid tipping into recession after it reported annualized growth of 0.3 percent in the second quarter. A recession is defined as at least two consecutive quarters of contraction in gross domestic product.

"Canada could still avoid a technical recession in 2009, but growth will be anaemic at best," said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal.

In recent weeks, senior government officials have remained optimistic about the economy and said Canada was in a better position than some other countries amid a global financial crisis that has battered markets.

But some economists say the economy has already entered a recession and that GDP data for the fourth quarter of 2008 and first quarter of 2009 will provide confirmation.

"The financial turmoil that seemed to reach a crescendo in recent weeks is one of those events that will likely cause an abrupt change in economic activity in Canada," said Jonathan Basile, economist at Credit Suisse in New York.

"So our view is not just for Canada, but for really all our major economies, that this is going to turn out to be a global recession."

HOUSING MARKET TO COOL

The poll also predicted the Bank of Canada will cut its key overnight interest rate by 50 basis points to 2.00 percent by the end of the fourth quarter from the current 2.50 percent.

The central bank, which unexpectedly cut its key rate by half a percentage point earlier this month in a coordinated move with other central banks to help calm financial markets, has two remaining scheduled interest rate announcements left for 2008 -- October 21 and December 9.