The financial crisis has undermined the functioning of the world credit markets and provoked a significant tightening of lending conditions for consumers and businesses. Even if deleveraging and forced asset sales let up in the months ahead–which is likely–the world economy isn’t likely to expand by more than 2 percent in 2009. According to the International Monetary Fund, world economic growth below 3 percent signifies a recession.

In the US, the housing crisis now its third year pushed the country into a consumer-led recession officially begun in December 2007. The slump in the real estate sector also spawned a worldwide financial crisis, which grew worse in the second half of 2008, dragging the other blocks of industrialized nations into recession as well. The emerging and developing economies have been caught in the wake.

The US recession is likely to carry on for 18 to 24 months, which would make it among the most severe of the last 80 years. The Federal Reserve has slashed its key rate from 5.25 percent to nearly 0 percent since September 2007, but the financial crisis has generated an increase in risk premiums and a credit crunch that continues to thwart monetary policy transmission.

Other central banks and fiscal authorities have taken exceptional action–with more promised–in the past few months to assure the solvency of the financial system and to inject liquidity directly into the economy in a bid to revive the credit markets. These aggressive measures mean we can expect the world economy to recover in 2009.

Canada remains less affected than other countries by the financial crisis due to relatively conservative financial practices, which earned its banking system top honors in terms of solvency among 134 countries examined by the World Economic Forum. But as a result of the recession hitting many of Canada’s key trade partners and the decline in commodity prices, a recession seems inevitable.

However, Canada shouldn’t suffer a deep downturn, as a very accommodating monetary policy and substantial budget stimulus measures from Ottawa will help sustain domestic demand. All regions will feel the effects of the US slowdown and the drop in commodity prices.

Though domestic demand will surely grow at a slower pace in Quebec, GDP will remain afloat in 2009 thanks to a sizeable backlog of orders in the aeronautics sector and the intensification of government investment in infrastructure.

In Ontario, the sharp decrease in exports in the auto sector will bring about a contraction in the economy, whereas in Alberta, the decline in energy prices has interrupted the economic boom. Finally, the completion of large-scale construction projects will ease the impact of the global slowdown in British Columbia and Atlantic Canada.