Economic growth seen at only 1.1% this year: TD

The Canadian economy will grind out slow growth of only 1.1 per cent in 2008 as problems with the U.S. economy "wash onto Canadian shores," TD Bank said Wednesday in a quarterly outlook.

The bank's chief economist, Don Drummond, said tight credit markets, and the "lethal" combination of a high loonie and weakening U.S. demand, are expected to crimp Canada's growth. The country will "narrowly miss" entering into a recession, the forecast says.Exportsare expected to contract in the first half of this year.

The first half of the year is expected to be very weak, with TD forecasting gross domestic product to contract by an annualized 0.4 per cent in the first quarter, and then grow by at a soft 0.2 per cent pace in the second quarter.

The situation is expected to vary greatly by region, with Ontario expected to post growth of only 0.5 per cent this year due to its heavy concentration on manufacturing. That would be the worst in the country, and the province's worst economic performance since 1992.

TD economists say there's a "significant risk"Ontario will experience a mild recession.

At the other end of the spectrum, Saskatchewan is expected to produce growth of three per cent, thanks to exports of energy products, agriculture and minerals.

Back in January, the Bank of Canada forecast that the national economy would grow by 1.8 per cent this year.

TD forecasters are also predicting that the central bank will cut its key lending rate by another 1.5 percentage points to two per cent by the middle of the year.

U.S. slump

TD expects 2008 will go down as a "recessionary" year in the United States with real growth of only 1.1 per cent.A similar performance is expected for 2009, the bank said.

"The adjustment underway in the U.S. is a necessary evil that will allow lenders and homeowners to work through oversupply, stagnating home prices, and the excesses of past lax lending standards," said Drummond.

"This will lead to fewer restraints in consumer spending and lending behaviour, allowing consumer spending to sustain a convincing recovery by the fall of that year," he said.

The U.S. Federal Reserve will likely trim its key lending rate by another 1.25 percentage points to match a historic low of just one per cent by August, according to the forecast.