Bank of Canada governor Mark Carney has admitted that Canada may see a recession in the coming year.
Carney gave a speech to a business audience in London, England on Wednesday, which touched on the state of the Canadian economy.
He said the economy is declining faster than expected and that additional stimulus would be necessary to keep inflation in check.
The central bank's next scheduled rate decision is on Dec. 9, and it is thought that interest rates will fall again at that point.
Carney's remarks suggested the economy would shrink in the final quarter of this year and would see no better than zero-growth in the first quarter of 2009.
But the central bank governor stopped short of predicting a recession -- which would require seeing two consecutive quarters of negative growth in Canada.
After the speech, however, Carney told reporters a recession in 2009 was at least "a possibility."
"Starting from flat growth in the first quarter of 2009 and the second quarter of 2009 ... recession is a possibility for Canada," he said.
Carney said Canada would likely see some level of growth in the second-half of 2009.
Several private-sector economists have already predicted that Canada's economy will shrink in 2009, for the first time in 17 years.
The manufacturing sectors of the provincial economies of Ontario and Quebec have shed tens of thousands of jobs this year, while the falling prices of various commodities -- including oil, metals, and grains -- have seriously hurt provincial economies in Western Canada.
Carney said the problems currently seen in the Canadian economy were largely the result of external factors.
Much of what is happening in the U.S. has affected Canada's economy in ways that cannot be avoided, he added.
With people losing their jobs and houses, there is far less demand for Canadian lumber and automotive products, he said.
"Thus, while domestic demand in Canada remains relatively healthy and the depreciation of the dollar will offset some of the declines in external demand, the risks to growth and inflation ... appear to have shifted to the downside.," he said.
In an interview with CNBC on Wednesday, Carney called the crisis in the U.S. "a big weight on our economy."
He said Canada anticipated some of the current problems in the U.S. and cut interest rates in half since last December in an effort to keep the economy rolling along as credit tightened up.
Canada also focused on keeping its financial system functioning, Carney said.
The main focus of Carney's speech on Wednesday was to argue that the global financial system must have continuously open markets at its core in order to achieve a full recovery.
"The pendulum is currently swinging back from market-dominated financing towards bank-dominated financing. We should not want the pendulum to swing too far," Carney said. "The capital requirements at the extreme are enormous.
"More fundamentally, market forces should be left to determine the relative size and boundaries of the banking and markets sectors. They will only do so if markets are built on solid foundations."
Although a sidebar, Carney's discussion about the state of Canada's economy underlines the fact that even country's with their finances in order are being heavily impacted by the failures in the U.S. and global markets.
With files from The Canadian Press
