TORONTO - The federal government is projecting a nearly stagnant economy next year, an outlook which could mean growing unemployment and declining wages for Canadians as the country struggles its way through a recession.
  
Finance Minister Jim Flaherty said in his mid-year economic update Thursday that Canada will fall into a technical recession -- two consecutive quarters of negative economic growth -- in the current quarter and the first three months of 2009.

Overall, Flaherty said the economy will shrink by one per cent in the current quarter, another 0.4 per cent in the January-March period and grow a paltry 0.3 per cent for all of 2009.

With the economy treading water, more and more ordinary Canadians will lose their jobs and new job seekers entering the workplace will find it harder to get work.

Unemployment is slated to rise to 6.9 per cent next year.

While that's still far below the 13 per cent jobless rate in the early 1980s recession and 10 per cent in 1991-93, it will still mean hardships across the country as thousands of jobs are shed in manufacturing, energy, mining and other troubled sectors.

BMO Capital Markets economist Doug Porter described Flaherty's economic forecast as "reasonable," although he said many economists expect the economy will be even weaker.

On average, the Canadian economy grows between 2.5 and three per cent each year, Porter said.

"So when you get down into those kind of levels (0.3 per cent growth), that really is not enough to absorb the new people entering into the labour force," he said. "It's also not enough to generate much in terms of productivity gains."

Flaherty predicted the jobless rate will rise to 6.9 per cent in 2009 from 6.2 per cent now, but Porter predicted it could hit 7.2 per cent, creeping up to 7.5 per cent by the end of the year -- with a loss of 50,000 jobs for the year.

"Of course, the economy has typically been generating 200,000 to 300,000 jobs a year, so even if we have any job losses, that's quite a turnaround from the sort of job growth we've seen recently," he said.

"And as the unemployment rate rises, you'll begin to see some of the steam come out of wages as the labour market loosens up."

Bruce Cran, president of the Consumers' Association of Canada, said consumers are even more pessimistic than the government and are reacting to the weak economy cutting their spending.

"From what we're hearing, it seems the government's a step or two behind the reality of what people are thinking at the moment," Cran said.

"Consumers don't have a lot of confidence in the future."

But Porter said the economic slowdown could include at least one piece of good news for consumers -- lower prices from retailers as they try to lure a tight-fisted shopper to their stores.

"There will be some downward pressure on Canadian consumers and I think that will lead to some heavy-duty discounting," he said.

Wal-Mart Canada, Sears Canada, Canadian Tire and others have already begun to cut prices ahead of the Christmas retail season.

Catherine Swift, president of the Canadian Federation of Independent Business, said many employees are worried about their wages as the economy cools off, adding she was disappointed to see government employees will still see a salary increase of 1.5 per cent next year.

"We already know the vast majority of public-sector employees earn much more than their private-sector counterparts and have much richer benefits, so I think a freeze right now would have been very welcomed by the small business community," Swift said.

"It isn't a lot, I know, but I bet a lot of employees out there won't be getting anywhere near that in the next year or two."