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The worsening global economic conditions will hold back the Canadian economy in 2012, the Bank of Canada says in its latest monetary report, at a cost of about $10 billion.

In its quarterly Monetary Policy Report, released Wednesday, the bank warns that the recession in Europe "is now expected to be deeper and longer than the Bank had anticipated."

The report predicts that the eurozone debt crisis will hold back Canada's economic growth by about 0.6 per cent in 2012, equivalent to about $10 billion. The cost to the global economy is forecast at one per cent, while the cost to the U.S. economy is expected to be about 0.8 per cent.

"Thus far, the impact on global financial conditions from the strains in Europe has consisted mostly of a general retrenchment from risk taking," the report said.

"Over the projection period, the impact is expected to become more widespread, however, and to take the form of increased funding pressures, adverse confidence effects and reduced availability of credit. In particular, deteriorating funding conditions are projected to push banks to restrict access to credit for households and businesses in Europe and the United States, adding to the drag on economic growth."

Canada's solid banking system, including Canadian financial institutions' limited exposure to the eurozone crisis, has helped protect against further dampening of economic growth, the report said.

However, global factors that do contribute to Canada's slower growth include a weakening of business and consumer confidence, lower commodity prices and generally poor financial conditions.

The bank says it assumes that officials in Europe will take the necessary steps to contain the crisis, "although this assumption is clearly subject to downside risks."

While the bank expects the Canadian economic recovery to continue, it is predicting growth to occur "at a more modest pace."

The economy grew by 2.4 per cent in 2011, according to the report. It projects growth of 2.0 per cent in 2012 and 2.8 per cent in 2013.

"While the economy appears to be operating with less slack than previously assumed, given the more modest growth profile, the economy is only anticipated to return to full capacity by the third quarter of 2013," the report said. That is one quarter earlier than was forecast in October.

Bank of Canada Governor Mark Carney told reporters Wednesday that the modest economic growth in Canada "is largely due to the external environment."

However, he also warned of the dampening effects on the economy of increased household spending and rising household debt.

Carney said he expects household spending to remain high through 2013, and predicts that the ratio of household debt to income will continue to increase. Household debt has reached record levels of 153 per cent relative to disposable annual income.

Yes despite concerns about personal debt, the bank chose to keep interest rates at historic lows Tuesday when it announced no change in its trendsetting policy rate, which is currently at one per cent.

On Tuesday, Carney conceded that keeping borrowing rates low encourages Canadians to take on more debt, particularly in the form of mortgages, which also inflates the real estate bubble.

Â鶹ӰÊÓ Channel's Mercedes Stephenson said Wednesday the bank is warning Canadians to police their own financial habits to avoid creating "unsustainable" personal finance conditions.

"I think there's a tendency that Canadians think this is an American problem, that Americans are the ones who have all the personal debt," Stephenson told Â鶹ӰÊÓ Channel in an interview from Ottawa. "But the Bank of Canada is being quite clear. This is something that Canadians have to be cautious about."

Economists predict the bank won't raise interest rates until 2013, possibly even as late as 2014.

According to the bank, however, the upshot to continued consumer spending is that without it, the Canadian economy would be doing much worse. Housing and consumer spending was responsible for 70 per cent of economic growth in 2011.

Wednesday's report did sound a positive note for business activity. While net exports are forecast to contribute little to growth due to moderate foreign demand and a high Canadian dollar, "business investment is expected to grow at a solid pace."