OTTAWA—Canada’s economy is slowing much faster than previously thought, the Bank of Canada said Thursday in a bleak outlook that stressed mounting risks from Europe’s debt crisis and a possible stall in the global recovery.

But Governor Mark Carney said the odds of the country sinking into a second recession are remote, adding that governments’ responses in backstopping European debt and pledging to restrain spending have mostly taken the worst-case scenario out of play.

“Those responses took out ... the possibility of something very bad happening because of the debt burden,” he said following release of the bank’s newest outlook on the economy.

What the responses have done, he continued, is added another drag to the recovery that will result in slower growth for the world in general and Canada in particular.

“(But) given the profile of growth in the three per cent area both in Canada and the United States, the prospect of that (double-dip recession) is very low,” he said.

For ordinary Canadians, the bank’s latest view of the economy suggests that recovery from the 2008-2009 recession will take longer and income growth will be slower than earlier expectations. The national jobless rate, now 7.9 per cent, has been slowly falling since last summer, but may take years to drop to pre-recession levels in the low six-per cent range.

However, the Bank of Canada is confident enough of its base-line scenario for growth occurring that it has hiked short-term interest rates a quarter point twice in as many months — the last coming Tuesday — and signalled Thursday that further increases are in the offing.

“The projection includes a gradual reduction in monetary stimulus consistent with achieving the inflation target” of two per cent, the bank states in its quarterly monetary policy report.

However, the 28-page document makes clear that the Bank of Canada’s governing council sees conditions in Canada and around the world deteriorating since its last assessment in April, and risk factors intensifying.

Canada’s economy is already in the midst of a sharp pull-back compared with the strong 6.1 per cent acceleration that occurred in the first three months of 2010, the bank says.

It estimates the just-ended second-quarter growth will come in at three per cent, almost a full percentage point below what the bank forecast in April.

As well, the current third quarter — spanning the July to September period — will be even weaker with a 2.8 per cent expansion. That’s seven-tenths of a point below the previous forecast.

For the year, the bank says Canada’s economy will advance 3.5 per cent this year and 2.9 per cent next year.

While employment has sharply picked up, the bank points out that hours worked remain down and income gains will be tepid going forward.

This will moderate consumer appetite for spending, further weakening the recovery.

The bank’s expectations of the Canadian dollar are also more modest, in the 96-cent range, due to dampened global demand and softer prices for commodities that Canada exports.

Canada’s pared-down economic expectations are mostly due to the global and U.S. recoveries not unfolding as strongly as anticipated, the bank says, scaling back expectations for the world as a whole to 4.2 per cent and for the United States to 2.9 per cent this year.

The new projections, lower than in April, are still some ways from a double-dip recession, but the bank cautions the risks of further deterioration are real.

It points to risks stemming from the European crisis, lower growth in China, high unemployment, loss of confidence, weak consumer demand and businesses too fearful to invest in the future.

“Some of the risks identified in the April report have materialized. Most notably, sovereign debt concerns in Europe have intensified,” the bank states.

“It should be noted that the downside risk of a more pervasive (European) crisis persists,” it adds at another point.

“If realized, the impact could be sizable. First, a severe disruption to bank funding markets could increase borrowing costs for firms and households. Second, the negative effects on Canadian exports could be substantial.”

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Overall, the bank flags a concern that “private demand around the world may be insufficient to sustain the recovery.”

The warnings come remarkably close to Fed chairman Ben Bernanke’s pronouncement to Congress on Wednesday that “the economic outlook remains unusually uncertain.” That remark caused markets to immediately dip.

The bank takes pains to note that is not its base-line, or most likely, forecast. Still, it thinks the European mess is knocking one-tenth of a point off Canadian growth his year, and will shave three-tenths of a point next year, and another two-tenths in 2012.

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