The worst of the economic and financial turmoil has passed, but a full recovery will be slow to come, the latest economic forecast from Desjardins Group says.

Economists at the cooperative financial group expect economic recovery in both Canada and the U.S. to be a gradual process. They predict that Canada’s real GDP will fall 2.6% in 2009 and then climb 1.7% in 2010, while American GDP will drop 3% this year, followed by growth of 1.4% in 2010.

“Activity sectors such as finance, real estate, the auto industry and forestry have been slammed. It will take time to put all the pieces back together,” said François Dupuis, Desjardins Group vice-president and chief economist. “Although we will reach bottom in the fall of 2009, we will have to wait until at least the fall of 2010 before production gets back to pre-recession levels and a true expansion phase begins.”

The global financial system faces an especially slow recovery, since the balance sheets of financial institutions are still contaminated by toxic assets, and losses on loans are mounting.

Economic recovery will be uneven across the country, according to the forecast. The economists consider Quebec’s economy to be in better shape than Ontario and Western Canada, since it is less dependent on the auto sector and raw materials. They expect Quebec’s economy to contract by 1.7% this year, compared to a sharp drop of 3.4% in Ontario’s GDP.

A recovery of the American economy will lead the rest of the world out of recession, according to Desjardins. “It is at the heart of the world’s commercial and financial trade and it will take more than one recession to change this fact. It is therefore unlikely that the planet’s economy will emerge from a recession separate from the United States, especially as commercial trade between nations has exploded in the last few decades,” the forecast says.

The recent stock market rally has been driven by investor hopes that economic growth will bounce back in the months ahead, and is unsustainable, according to Dupuis.

“Spikes in the stock market, oil prices, the Canadian dollar and interest rates should not continue; the next few months will be calmer,” he said. But he believes another rally could take place in the fall, when the foundations for recovery have set in.

Desjardins expects that central banks will continue to take extraordinary measures to ensure a recovery is underway. The U.S. Federal Reserve will likely expand its quantitative easing policy and its program to purchase federal bonds, while the Bank of Canada will continue to watch economic indicators before taking non-traditional measures, the forecast says.

“The most important thing is to reassure markets that the central banks are prepared to respond to any upheaval promptly,” the economists said.

IE