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OTTAWA -- Canada should avoid a recession, but the cost of gasoline, heating and groceries will continue to rise until early next year.

This was the message from Mark Carney, governor of the Bank of Canada, in his latest report on the health of the Canadian economy.

The quarterly report said Canada was facing three challenges: The slowing U.S. economy, the rising price of energy and wobbly global financial markets. Despite these difficulties, Carney believes the worst is over.

"The economy picks up from this point in our projection through 2008 and further accelerates into 2009," he said.

The Bank of Canada was forced to revise its April projection that the Canadian economy would grow by 1% in the first three months of the year.

Hindsight revealed the economy actually shrank by 0.3% over that period.

The April projection also said Canada's economy would grow by 1.4% overall in 2008, but was later revised to predict 1% growth.

A recession is defined as two consecutive three-month quarters of negative growth.

The Bank of Canada said yesterday that the economy would grow by 0.8% in the second quarter of 2008, but we won't know for sure if we've avoided a recession until Statistics Canada releases its figures mid-August.

Overall, the report was positive. Carney explained that our banks have lots of money compared to their American counterparts. He also said Canadian financial institutions were smart enough to avoid the mortgage troubles plaguing American banks.

"When you look at the change between April and now, the vast majority of the change into 2009 is the price of energy, so the price of gas, the price of natural gas and gas for our cars is going up," Carney said.