The global economy is returning to growth, but the pace of growth will remain lower than normal in the years ahead, Scotiabank’s chief economist and senior vice-president Warren Jestin said on Tuesday.

Speaking at a market and economic outlook conference in Toronto, Jestin said a recovery is underway, but economic conditions will not return to pre-recession levels.

In the next six months, he expects government stimulus to play a major role in driving economic activity: “The government will account for a large chunk of overall growth in the months ahead,” Jestin said.

But beyond the spring and summer months of 2010, when governments scale back fiscal stimulus, Jestin expects a period of slower growth. While Canada and the U.S. will experience economic growth over the next five years, he said growth over that period will not be as robust as it was during the period prior to the recession.

“I’m not optimistic that it will be accelerating growth,” said Jestin. “What we are going into now, in my view, in the developed economies, is a world where growth is generally slower.”

He said economic growth over the next five years will likely average 2.5% in Canada and the U.S., and less than 2% in Europe.

For 2010, Scotia Economics expects real GDP growth of 2.7% in Canada, and growth of 3.3% in the U.S.

Jestin said the recovery in Japan and major European economies will likely take much longer than in North America, lasting through 2011 and beyond, since these economies suffered such major setbacks during the recession.

Meanwhile, emerging markets such as China and India are poised for much stronger growth in the years ahead, Jestin said.

“The emerging world is going to outperform the developed world by a very substantial margin,” he said. “We are not going back to the world that existed before this recession began.”

Equity outlook

Investors have seen the performance of stocks markets far exceed economic performance in 2009, but the opposite could occur in 2010, according to Vincent Delisle, director of portfolio strategy at Scotiabank.

“I think in 2010, the economy could actually upstage equity markets,” Delisle said, speaking at the conference.

But there is still upside for equities: Delisle expects returns of 10% to 12% for equities in 2010. At current levels, he does not believe markets are overvalued.

He expects earnings growth of 25% to 30% next year.

“Earnings growth, I think, is underestimated still in the market, and will be the main catalyst driving equity prices up,” he said.

In the near term, equities in Canada and emerging markets are likely to outperform those in the U.S. and Europe, according to Delisle. But at some point next year, he expects this trend to reverse, with larger economies beginning to outperform smaller ones.

In terms of sectors, Delisle expects cyclical stocks to continue to perform well into the first half of 2010. But in the second half of the year, when government stimulus begins to wane and the recovery begins to lose momentum, he said investors would be wise to reduce exposure to cyclicals and boost holdings of defensive sectors.