The latest Business Outlook Survey from the Bank of Canada may foreshadow some explosive growth later this year, say Merrill Lynch economists.

In a new report, Merrill says that the latest survey data “suggests the economy could see a quarter (or even two) of 10% growth in the next year.”

“Since the loftiest private sector forecast is well under 4% (admittedly our own), the markets are far too fixated on the slow, halting, return to growth scenario, in our opinion — especially since recoveries virtually never have that nice linear trajectory,” it says.

Merrill notes that the survey “did an abrupt about-face in the second quarter”, and it notes that the correlation with real GDP growth is quite strong at 60%, implying year-over-year growth in the 4.25% range.

“For the next couple of quarters, weak or even negative quarterly annualized GDP prints are a strong possibility since the auto sector is in the process of downsizing. That suggests that a burst of growth in [the fourth quarter of 2009] or [the first quarter of next year] would be necessary to get anywhere close to 4.25% year-on-year growth,” it suggests.

While markets have been disappointed by the recent economic data, Merrill points out that the survey was taken between late May and mid-June “and thus is more up-to-date on the state of the economy than most of the recent data flow.”

Additionally, it says that the survey has an even stronger correlation with U.S. economic activity than it does for Canadian growth. “If true, businesses may be getting a sense of better cross border order-flow that we have not yet seen in any hard data release, and we may see a better tone in those trade figures in the next couple of quarters. Certainly, the unusual jump in Canada railcar shipments in June and into July corroborates this possibility,” it concludes.

IE