Canadians can expect economic growth to grind to a near halt in the second quarter of the year because of the U.S. slowdown and the global credit crunch, the Bank of Canada said Thursday.

In its monetary policy report, the central bank said economic growth for the April-June quarter will hit an annual rate of only 0.3 per cent, down from a January expectation of two per cent growth.

The bank also sees growth of 1.8 per cent for the last six months of this year — down from its previous estimate of 2.3 per cent.

"The deterioration in economic and financial conditions in the United States will have significant spillover effects globally, particularly in the industrial economies," the bank said in its quarterly outlook.

In Ottawa, Bank of Canada governor Mark Carney said strong domestic demand is offsetting some of the fallout from the U.S. situation and the credit slowdown.

"Consumer confidence is quite strong at present," Carney said during a news conference, but he added it is reasonable to expect some softening of that confidence among Canadian consumers and businesses.

Carney told reporters that U.S. economic growth is expected to be stalled for the first quarter and negative in the second quarter.

The bank sees only one per cent overall growth in the U.S. this year, followed by 1.7 per cent next year, rising to 3.4 per cent in 2010.

The current U.S. economic malaise will push down Canadian exports until they begin to improve in the second half of this year and 2009.

Tensions in the world credit market are expected to persist through the rest of 2008 before starting to ease sometime next year. The central bank doesn't see credit markets returning to normal until 2010.

Household borrowing still 'strong'

Despite the credit crunch, the central bank notes that it hasn't become more difficult for Canadian consumers to borrow. Even though fixed mortgage rates haven't fallen as fast as the Bank of Canada has slashed its key overnight rate, the central bank says growth in household borrowing remains "strong, despite some deceleration thus far in 2008."

The report comes just two days after the central bank cut its key interest rate by half a percentage point to three per cent in a move to give the Canadian economy a shot in the arm.

The bank reiterated that further interest rate cuts are likely in the medium term.

Conditions in Canada are expected to remain soft in 2009 — with the central bank forecasting first-half growth of 2.7 per cent, and second-half growth of 3.3 per cent.

The economy is expected to get back into balance in 2010, when the Bank of Canada sees growth of 3.4 per cent.