The U.S economy is in a recession, BMO Capital Markets said Wednesday as it lowered its growth forecasts for both the U.S. and Canada. 

"The marked and widespread deterioration of business, consumer and investor sentiment since the start of 2008 has prompted us to revisit and revise our forecast," said the report from the brokerage firm's research department.

The firm now forecasts that U.S. GDP will fall by 0.5 per cent in the first quarter and contract by a further one per cent in the second.

The forecast pointed to a housing sector that "shows no sign of bottoming," tightening credit conditions, rising unemployment, dismal retail sales and higher energy prices that squeeze consumers' purchasing power.  

"All in all, the U.S economy likely slipped into a modest recession around the turn of the year," said the report, which was titled "Recalibrating the Forecast."

Several U.S. banks have also said recently that the American economy is in recession, or about to enter one.

The U.S. Federal Reserve will likely add to Tuesday's big interest rate cut with another 1.5 percentage points — bringing the federal funds overnight rate down to two per cent by mid-year.

More rate cuts are coming in Canada, too, according to the forecast — down to an average of three per cent by the second half of the year. The key overnight rate is currently four per cent. 

A new forecast out Wednesday from JP Morgan Canada predicts the Bank of Canada will lower interest rates even more aggressively — down to 2.75 per cent by June. 

The BMO forecast now sees Canadian GDP growth of just 1.4 per cent in 2008 — down from the previous forecast of 2.2 per cent.

BMO Capital Markets also sees Canada's unemployment rate rising to seven per cent by the end of the year. It's currently 5.9 per cent.