BMO chief economist Sherry Cooper issued a blunt assessment Thursday: "Expect recession in Canada," she wrote in a research note.

"The boom has turned to bust," she said. "Canada ¥ is headed for recession and our government will awaken to the need for deficit spending," Cooper said. "We are not immune to the global difficulties and the sooner we realize that and take action to mitigate the domestic damage, the better."

Prime Minister Stephen Harper insisted repeatedly during the just-completed federal election campaign that he will not allow the government to run a deficit. In a post-mortem a day after his government was returned to power with a strengthened minority, Harper said his finance minister will present a fiscal update to Parliament before the end of November.

The financial crisis, while hopefully diminishing, "leaves in its wake a dramatic slowdown in the U.S. and elsewhere," Cooper wrote on Thursday. "The stock market is reflecting that reality. The problems are viral, as we have seen, and Canada is not immune. Unfortunately, the likelihood of a protracted and deep recession in the U.S. is high, with the rest of the world mirroring the U.S. in varying degrees."

She said financial problems in the U.S. have moved beyond the housing market into a full blown consumer recession. The sizable decline in stocks in the past two days reflects the growing awareness that the U.S. economy is going into a deeper and more protracted recession than expected, Cooper said.

"While very dramatic actions have been taken by financial authorities worldwide, it will take some time before the free flow of credit emerges, and even more time until the economy recovers," she said. "It is painfully obvious that decoupling of other economies and financial markets was wishful thinking. The housing and credit bubbles have popped; and now the stock market shock is adding to consumer and business woes."

By Geoff Matthews, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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