Talk of a looming economic recession in the U.S. is moving from a question of "if" to a debate about "how serious," a shift that doesn't bode well for Canada's economic prospects.

Some U.S. observers are now warning that any economic recession south of the border could be more severe than the one brought on by the burst of the tech bubble in 2001 and, possibly, on par with some of the more severe financial crises in industrialized countries since the end of the Second World War.

Reasons cited include a meltdown in the subprime mortgage market, an ongoing credit crunch, high energy prices, a weakening job market and faltering consumer spending.

No matter how you slice it, observers say, a further slump in the U.S. economy is bound to have an impact on Canada – it's just a matter of how severe.

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"We're not immune to a U.S. slowdown," said Michael Gregory, a senior economist and managing director with BMO Capital Markets.

Gregory said the odds are tilted to the U.S. slipping into a recession – defined as two consecutive quarters of negative economic growth – but he cautioned that momentum in the Canadian domestic economy should be enough to weather everything from a slowdown to a mild recession south of the border.

But all bets are off if the U.S. economy slides into a prolonged period of contraction because the close trade relationship between Canada and the United States will mean fallout for Canada.

Hardest hit would be the already wobbly manufacturing heartland in Ontario and Quebec since most of the goods produced in the two provinces are destined for sale south of the border.

"With U.S. economic prospects now beginning to dim, that's really rubbing salt into a wound created by a strong Canadian dollar," Gregory said. "Goods are more expensive and customers will be buying less of them because their economy is weak.

"It will be a disproportionate impact."

That in turn could create a ripple effect throughout the broader Canadian economy by cutting employment and consumer spending, which have so far been relatively unaffected by a weakened U.S. economy.

Canada and its commodity-related market could also be hit if foreign appetites for raw materials also begin to wane.

While some had argued that a "decoupling" of global and U.S. economies had occurred thanks to the growth of emerging economies such as China's, the theory was put to the test yesterday as growing fears of a U.S. recession routed global markets.

Markets in the U.S. were closed yesterday because of the holiday celebrating Martin Luther King.

However, not everyone is convinced the U.S. economy will tip over the edge.

"Certainly the farther down the U.S. goes, the harder the impact on Canada," said Derek Burleton, a senior economist at Toronto Dominion Bank.

"But I do think the jury remains out on whether the U.S. will even move into recession. I don't think it's a slam dunk."

In particular, Burleton cited the economic stimulus package proposed last week by U.S. President George Bush and interest rate cuts as forces that should help to stabilize the U.S. economy. He also suggested that the weak greenback is favourable to U.S. manufacturers that are selling into a still-growing global market.

He pegged the odds of a "protracted" U.S. recession at about 20 per cent, but noted the concerns expressed by investors are justified because of the significant downside risks.

"Whenever you've got an implosion of a bubble, particularly in the housing market, it's very difficult to gauge what kind of impact it's going to have."

Meanwhile, an annual survey released yesterday by consultants Watson Wyatt found Canadian economists and portfolio managers predicted GDP growth would fall below 2.5 per cent this year, but would rebound to around 3 per cent before the end of the decade.