Canada and the United States are in the midst of an economic storm which will not break until at least 2010, said Scotiabank in its latest economic forecast released Wednesday.

Canada's economy will contract by more than one per cent next year as domestic activity slows in line with the stumbling U.S. economy, Scotiabank said.

Both economies will shrink substantially next year along with most of the industrialized world, said the bank's senior vice-president and chief economist Warren Jestin.

"The seismic shock delivered by the U.S. sub-prime fiasco to world financial markets has now triggered retrenchments in North America, Europe and Japan and has substantially undermined economic prospects in emerging economies," Jestin said.

Hard to borrow

The ongoing global credit crunch has hammered the ability of companies to borrow cash, crimped the net worth of consumers who are watching their spending and body-slammed countries' export prospects.

As a result, economists, who had been gloomy in their outlook earlier in the year, are positively Halley's comet-like in their prediction of disaster for the world economy.

"Global economic activity is receding rapidly, despite unprecedented government actions to support credit markets and inject big doses of monetary and fiscal stimulus to revive consumer, business and investor confidence," Jestin said in his report, aptly titled Heading South for the Winter, a reference to GDP growth rates, not vacation hot spots.

Below the border, the American economic juggernaut is no more, Scotiabank said, predicting U.S. GDP will shrink more than two per cent.

Interestingly, Scotiabank's forecast is among the more pessimistic among professional prognosticators.

The International Monetary Fund, for instance, believes Canada's economy will grow in 2009 at a clip slightly higher than one per cent. Scotiabank's more dour outlook, however, might be more a function of its later publication date rather than any gloomier sentiment on the part of the bank.

Scotiabank also forecast that Canada and the United States would bounce back somewhat in 2010, with growth rates in both countries approaching two per cent.

At the beginning of 2008, however, economists, who had predicted an economic downturn in the year, were expecting a mild slowdown, not the full-stop recession that has occurred.

As a result, any forecasts longer than a few quarters run the biggest risk of missing their target in the current environment.