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Canada economy to recover in second half: economists

The Canadian economy should emerge from recession during the second half of the year as stimulus measures take effect, setting the stage for interest rate hikes in a year, a Reuters poll showed on Wednesday.

The quarterly economic survey of 20 economists, conducted in the days before the Bank of Canada made an expected rate cut of a half-percentage point to a 50-year low of 1.0% on Tuesday, found the economy will contract by an annualised 1.1% this year.

That is in stark comparison with forecasts for growth of 1.1% in a poll three months ago and point to even lower rates at the central bank's next policy meeting in March.

Much has changed since then, when economists were still largely convinced the Canadian economy would narrowly miss recession, defined as at least two consecutive quarters of contraction in gross domestic product (GDP).

All the economists surveyed said the economy would contract in the first quarter of this year, but a small number expect growth as early as the second quarter. The median forecast showed growth of 0.9% as soon as July-September.

Growth should then pick up again in the fourth quarter to an annualised 2.0% and the momentum will likely carry into 2010 when it will reach 2.0% for the year as a whole, according to the poll.

"Canada should be out of recession in Q3/09, but only modest recovery is expected in 2010. Patience will be a good ally," said Sebastien Lavoie, an economist at Laurentian Bank Securities in Montreal.

A separate poll of twelve Toronto securities dealers found eight looking for another interest rate cut at the Bank of Canada's March meeting, with six looking for a half-point cut to 0.50%.

Economists said broad fiscal and budgetary stimulus plans would put the economy back on the growth track.

The federal government is expected to unveil more one- to two-year plans in its budget next Tuesday. Stimulus packages and loosening credit around the world should also help the global economy recover from recession in the second half of the year.

"The Canadian economy should begin to grow again as government stimulus takes hold, commodity prices rise again, and as the rest of the world emerges from the recession," said Millan Mulraine, economics strategist at TD Securities.

RATES SEEN RISING IN 2010

Economists expect rates to fall to 0.75% in the first quarter and then stay on hold until next year, the survey showed.

Core inflation, which excludes volatile items such as gasoline and is the Bank of Canada's preferred gauge of underlying price trends, is forecast at a 1.6% yearly rate at the end of 2009 and 1.7% at the end of 2010.

Housing starts are expected to average 170,000 units in 2009, slipping from the 212,366 units recorded in 2008, well off the record 228,343 units in 2007. New home construction is seen averaging 171,000 units next year, the survey showed.

Canada's unemployment rate is expected to jump to 7.5% this year, according to median forecasts, steadily rising from the current 6.6% recorded in December. It is expected to edge up to 7.8% in 2010.

Ka Yan Ng, Reuters

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