OTTAWA — Canadian and U.S. central bankers warned of tougher times ahead on Tuesday as the slumping North American economies suddenly appeared more vulnerable to job loss, financial failures, inflation and weaker consumer spending.

Bank of Canada governor Mark Carney and U.S. Federal Reserve Board chairman Ben Bernanke issued separate but equally blunt assessments, saying both their economies are combatting rising inflationary pressures and slowing growth.

Meanwhile, signals of growing weakness mounted throughout the day.

• General Motors Corp. announced plans to cut its U.S. and Canadian white-collar salary budget by 20 per cent, further reduce truck production, suspend its dividend and borrow US$2 billion to US$3 billion.
• The U.S. Labour Department reported that soaring costs for gasoline and food pushed wholesale prices up 9.2 per cent in June from last year, the biggest yearly surge since 1981. Meanwhile, retail sales edged up a tiny 0.1 per cent that included a sharp downturn at auto dealerships.
• In Canada, a pillar of strength in the domestic economy showed signs of crumbling as house prices experienced their first decline in nine years last month. Home prices in major markets edged down 0.4 per cent from last June, and sales volumes plummeted, by as much as 42 per cent in Greater Vancouver.

The bad news, following the weekend's revelations over continuing turmoil in financial and mortgage markets in the United States sent the Toronto Stock Exchange plunging 450 points at one point, recovering slightly to close down 383.73 points to 13,357.56.

As well, oil prices dipped almost US$10 a barrel during the day on fears the U.S. economic malaise would prove more stubborn than forecast. Crude closed the day at $138.74 a barrel, down $6.44.

"The U.S. financial markets and the U.S. economy are in crisis and the ramifications for the rest of the world are enormous,'' BMO Capital Markets chief economist Sherry Cooper in said a note to clients.

"Layoffs are rising sharply and the fear of unemployment is palpable. Daily announcements of major layoffs accompanied by record-high gasoline and food prices as wealth destruction continues have driven U.S. consumer confidence down to very low levels.''

Bernanke told the Senate banking committee in Washington that the problems of rising prices, slumping home values and financial sector difficulties pose "significant downside risks'' for the economy and "significant challenges'' for policy makers.

Carney cited the identical stagflation concerns in Canada -- rising inflation, slowing growth -- although less pronounced and from different origins.

In a statement on his decision to keep interest rates where they were, Carney said there were three major developments affecting the Canadian economy.

"The protracted weakness in the U.S. economy, ongoing turbulence in global financial markets, and sharp increases in many commodity prices,'' he said.

The first two are evolving as expected, Carney said, but commodity price spikes, particularly oil, are exceeding all expectations.

Both central bankers presented a rosier picture of the future, however, with the Canadian economy forecast to begin its recovery in 2009 and inflation -- which Carney said will rise beyond four per cent early next year -- set to settle back to the bank's target of two per cent by the end of 2009.

But it will get worse before it gets better, said Scotiabank economist Derek Holt.

Canada's economy actually shrank 0.3 per cent in the first three months on an annualized basis, but most economists expect the second quarter will rebound.

Continued weak demand from the United States and slumping domestic demand in Canada, as evidenced by the slowing housing sector, will make for a rough conclusion to 2008, Holt predicted.

"The positives for Canada is that Canadian governments are in a strong fiscal position with huge federal and provincial government surpluses. If we need to bring forth more fiscal stimulus, we have the means to that much more than the U.S. and Europe,'' he said.