Merrill Lynch expects the Canadian economy to perform worse than the Bank of Canada and other economists are predicting.

In a research note, the firm reports that the results from Statistics Canada’s quarterly Business Conditions Survey: Traveler accommodation industries released today “were by far the worst in the three-and-a-half years since the survey began”.

Merrill notes drops in expected occupancy rates, corporate/commercial travel, daily room rates and employee hours. “In aggregate, it appears that hoteliers are expecting Q3 to bring by far the most challenging operating environment in recent memory,” Merrill says.

“There will be a direct hit to the economy from slumping tourism,” it cautions. However, Merrill says that its greater concern, “is what this sector’s struggles tell us about the economy more broadly.”

“Lower leisure travel tells us that higher energy prices are indeed causing households to scale back on discretionary spending. Lower business travel tells us that activity more broadly is softening,” it suggests.

As a result, Merrill says, “We continue to expect that consensus & BoC expectations of a sustained improvement in Canadian growth through [the second half of 2008] will be disappointed.”