The basic dimensions of the recession remain unknown; the decline has been deeper and longer than many expected — and there’s no end in sight. But many economists are looking beyond the recession to the recovery, and what they see is a new, more austere norm.

Among the many novel aspects of the current global recession, one of the most surprising is how quickly and deeply the downturn took hold around the world. No major economy has stood up to the slide. And, absent any meaningful support for growth, economic conditions have deteriorated sharply, consistently outpacing all but the most pessimistic forecasts.

As a result, the latest round of forecasts from major institutions continue to head south. The International Monetary Fund sees global gross domestic product contracting by 1.3% in 2009, down from the 0.5% growth forecast in January, which was itself a big cut from the 2.2% growth the IMF forecast in November. At this time last year, the IMF was predicting 3.8% growth for 2009.

The same basic trend is evident here at home. The Bank of Canada’s latest Monetary Policy Report predicts a 3% decline in Canada’s GDP this year before a rebound finally emerges in the fourth quarter, leading to 2.5% growth in 2010. Like the IMF, the BofC’s latest forecast represents a dramatic revision downward: just a year ago, the central bank expected GDP to grow by 2.4% this year and 3.3% in 2010.

Given these recent track records, then, it’s hard to put too much faith in these, or any other, predictions for the world economy over the next couple of years. Indeed, forecasters admit that there is a great deal of uncertainty to their latest predictions.

The latest source of ambiguity is monetary policy, which has now moved into the experimental stage in several countries, including the U.S. and Britain. Central bankers have effectively lowered rates as far as they can go and are now toying with alternative means of providing monetary stimulus, such as credit and quantitative easing — unprecedented actions that add another element of uncertainty to global uncertainty. (These options are on the table in Canada, too, but are only likely to be used, says BofC governor Mark Carney, if further negative shocks materialize.)

The big wild card remains the health of the global financial system. If it remains significantly impaired, the recession could be longer and deeper than current forecasts allow. But if efforts to repair bank balance sheets go better than many expect, and confidence flourishes and credit starts flowing freely once again, the rebound could be sharper than anticipated.

Ordinary recessions typically last for a few quarters and end with a rapid recovery. Indeed, as economists at Britain-based HSBC Bank PLC observe in a research report: “If recent history were a reliable guide, we could look forward to a quick end to the economic crisis.”

In this case, however, the report suggests, “Recent history is misleading.” This is no ordinary recession: industrial production has declined by much more than usual, despite massive efforts to stimulate the economy by governments and central banks; corporate profits are deteriorating; and unemployment is rising.

As a result, the HSBC report calls for a healthy dose of skepticism amidst claims that signs of recovery are appearing: “Trust in the financial system will take years to rebuild. In the meantime, households and companies will be looking to pay off debts and rebuild their assets.”

For what it’s worth, HSBC has also lowered its latest forecast for the global economy — to a 1.9% decline overall this year, with a 3.0% decline in the developed world.

While the economy’s short-term trajectory and the time to recovery may be exceptionally doubtful, what does appear to be certain is that once the economy does recover, it is not likely to return to its pre-crisis state. The changes wrought by this recession, coupled with other secular trends, will probably leave countries in the developed world facing lower growth rates.

In fact, the BofC has lowered its assumptions for potential output growth to 1.2% for 2009, 1.5% in 2010 and 1.9% in 2011 — down from forecasts of 2.4% in 2009, and 2.5% in 2010 and 2011 — reflecting the restructuring that the BofC sees taking place in several industries — most notably, the auto industry and the forestry sector. “Owing to their scale and abruptness,” the Monetary Policy Report says, “these changes will have an important effect on the current level of potential output and on its short-term growth rate.

@page_break@“The closing of plants and other establishments will render a significant proportion of the capital stock obsolete,” the report maintains. “There will also be adjustment costs as labour is gradually redeployed to other activities.”

Couple these trends with much lower investment and the result is reduced labour productivity, which, in turn, lowers potential growth.

This sort of restructuring isn’t taking place just in Canada; it’s going on all over the world, reflecting the global nature of this recession. Indeed, elsewhere in the world, the structural imbalances that must be addressed are more dramatic, and foreign governments have been forced to take more extreme policy actions to combat the financial crisis and the recession.

“The current crisis in the world economy is not a cyclical event but a structural event,” economists at UBS Ltd. observe in a recent research report. “As such, it changes relationships among different economic components.”

These changing relationships, the report notes, affect economic efficiency. For the past 20 years, the UBS report explains, the global economy has enjoyed a virtuous cycle as economic risks declined, capital became cheaper, investment rose and growth rose as a result. But that cycle is now running in reverse: “It is clear that risks surrounding globalization, regulation and (of course) credit are now rising. These increased risks will require higher compensating risk premiums. [As a result], the virtuous cycle goes into reverse, and trend rates of growth decline.

“The conclusion from changing risk and investment profiles,” the report notes, “is that the world economy is likely to experience a lower trend rate of growth in the future than was the case in the past.”

So, those UBS economists have lowered their 10-year average annual global growth estimate to 3.4% from 3.8%. Their forecasted average growth rates for the U.S., Europe, Britain, Japan, China, Brazil and Russia have all been lowered, too.

For Canada, the scale and scope of structural changes that take place south of the border are crucial. In a recent presentation, Toronto-based Toronto-Dominion Bank chief economist Don Drummond cautioned that the U.S.’s economic woes will probably outlive the current recession: “There will be recovery, in good part due to the extraordinary monetary and fiscal stimulus. But the root causes of the U.S. trouble, such as inadequate savings, will plague its economy for a long time.”

Additionally, the retrenchment of the financial services industry — including the effects of recapitalization, deleveraging and reintermediation — will hamper growth, Drummond notes. And, once the recovery takes hold, the U.S. government will have to curb its spending, thereby reducing growth momentum.

Indeed, while governments have stepped in to boost the flow of credit on the monetary side while stimulating spending on the fiscal side, all of that comes at a cost. There is some concern that governments, like the banks before them, are taking too much risk with their balance sheets as they fight the financial crisis and combat the recession. The unpleasant results — higher inflation and rising deficits — are likely to create pressure in the future for lower spending or higher taxes, or both.

“The main problem governments will have to tackle once the financial crisis is past and the recession overcome,” warns a recent UBS Financial Services Inc.report, “is to control the potential damage from the flood of liquidity and the massive increase in public debt that will accompany the rescue packages. As one set of imbalances begins to fade, another one, this time on the balance sheets of governments, is set to grow.”

And that doesn’t take into account other major challenges that governments face, such as aging populations, which present a significant headwind for many developed countries and is likely to serve as a further drag on future growth.

Naturally, the financial services sector, which lies at the heart of today’s crisis, is probably in for some serious structural change as well. “Overall,” notes the UBS report, “we expect that after the crisis passes, the financial [services] sector in developed economies will be more heavily regulated and will face more limited growth opportunities than in the past.”

While the report concedes that it’s tough to make meaningful predictions about the future of the financial services sector, given the hurdles still to be cleared — stabilizing the system, absorbing credit losses and grappling with ongoing government intervention — it nevertheless assumes that the sector will face a tougher regulatory environment in the years ahead. And, the report suggests, industry return on equity will be lower, due to lower leverage and reduced business volumes.

“Furthermore, we expect lower longer-term earnings growth than in the past two decades,” the report says, “as higher-margin and higher-growth (and higher-risk) activities are curtailed, whether by market realities, loss of risk appetite or, ultimately, by new regulation and enhanced supervision.”

So, even when the economic clouds do part, the outlook for financial services doesn’t get a whole lot brighter. IE