The Canadian economy is now in recession, but Bank of Montreal economists expect the downturn will prove modest by historical standards.

A forecast released today predicts that economic growth will resume early next year, thanks to the economic stimulus already in place before the economy entered the period of declining output.

“The difference between this recession and the previous downturns of the early 1990s and 1980s is that monetary and fiscal stimulus had a head start on the downturn,” said Tim O’Neill, chief economist, Bank of Montreal. “Critically, both the U.S. Federal Reserve and the Bank of Canada began cutting interest rates in January and that, with the usual time lags, should moderate the downturn and hasten the rebound.”

The bank’s economists estimate that the U.S. economy was already slowing into the fall, but that the events of September 11th “tipped a weak economy into at least a mild recession”. The forecast predicts that the U.S. economy will shrink by less than 1% in the second half of this year, dragging the Canadian economy down with it. By early next year, however, the worst should be over and growth should strengthen through 2002 and into 2003.

Bank economists forecast quarterly growth to be at or above 4% in the United States and Canada during the second half of 2002. Lean inventories, growth in government spending and rebounds in consumer and business investment should lead the way in fuelling the U.S. recovery. The rebound in the U.S. will strongly contribute to the upswing in the Canadian economy. Growth in 2003 is expected to average 4.1% in Canada and 3.9% in the United States.

“There is more than the usual level of international uncertainty reflected in the economic outlook this time around,” Mr. O’Neill stressed, “but there are also some strong positive signs. Inflation is low and government finances are in far better shape.”

The strong economic growth in the second half of next year will come too late to prevent the unemployment rate from rising above 8% in Canada, but it will put job creation back on a stronger path.

At the regional level, bank economists project that Ontario and Quebec will be particularly affected by the cyclical slowdown and weakness in U.S. demand.

British Columbia, which had been recovering in the early part of this year, will be hurt by the ongoing slide in commodity prices.

Although not unaffected by the U.S. slowdown, other regions have more specific reasons for their cooling this year: drought in Saskatchewan and the completion of several major projects in Atlantic Canada.

Most provinces can expect stronger economic growth later next year and into 2003 in line with a robust U.S. recovery. Alberta and Newfoundland will benefit from their continued development of energy resources.