“The return of confidence among consumers and entrepreneurs, the upturn in stock markets and the overall easing of financial tensions around the world are seen as basic elements that help support recovery,” say economists with Desjardins Group.

That is the conclusion that Desjardins Group’s latest economic forecast, released Friday.

“It is now possible for us to seriously consider the restoration of our economies, even if we may face many pitfalls on the road to recovery, since risks are everywhere!,” says François Dupuis, Desjardins Group vice president and chief economist.

The report notes that rising consumer confidence has already pushed up the real estate market and consumer spending. Exports continue heading downwards, however, and business inventories compared to sales remain high.

The recent increase in the Canadian dollar, which relies mostly on the upsurge in prices for oil and raw materials, should continue and reach parity with the greenback by mid-2010, the report notes.

The report says the loonie’s rise will be relatively gradual, “thus preventing any intervention from the Bank of Canada on foreign exchange markets”, but will make things more difficult for Canada’s exporters.

Foreign trade is not the only obstacle to economic growth. Historical comparisons show the current level of inventories to be high and that further corrections are needed. “Before kick-starting production, businesses will have to reduce their inventories,” says Yves St-Maurice, director and deputy chief economist at Desjardins Group.

According to the report, the impact will be felt on both business investments and the labour market. The unemployment rate will soon close in on 10% in Canada and Québec and, like in the U.S., job losses will continue to mount until early 2010.

On a provincial basis, Desjardins Group forecasts Ontario’s real GDP to decline by 3.8% in 2009, compared to a 2.7% pullback for Canada.

Further West, the drop in oil prices and a shakier housing sector call for a 2.8% decline in Alberta’s real GDP and a 2.4% decline for British Columbia. Quebec will come out of this in better shape with a decline of only 1.8% for 2009.

For 2010, Desjardins economists say B.C. should post the strongest growth in Canada with gains of 3% as a result of hosting the Winter Olympic Games.

The rebound in oil prices will allow Alberta to follow close behind with 2.5%. Ontario will benefit from the recovery in the automobile industry, posting growth similar to the Canadian average. Quebec will lag behind somewhat, recording real GDP growth of 1.6%.

On a global basis, the report says emerging countries, dominated by China and India, will lead the way with growth of 4.7% in 2010. The industrialized countries will be unable to keep up, with a meagre increase of 1.3% in their real GDP.

“The U.S. and Canada will be the front runners with increases of 2.2% and 2% respectively, signalling a U-shaped rather than a more traditional V-shaped recovery. All of the other G7 countries, with the exception of Japan, will post economic growth of less than 1% in 2010,” Desjardins economists say.

Global interest rates are expected to remain flat as “the economic and financial environment is far too fragile for them to act any earlier than in mid-2010.”

The report notes that demand for good quality securities remains high which helps dispel concerns about financing the huge U.S. deficit. Desjardins economists forecast the S&P 500 to post gains of 11% in 2009 and 14% in 2010. The respective anticipated increases for the S&P/TSX are 20% and 11%.

The report note several risks to Desjardins’ forecast. A new wave of high-risk mortgage loan renewals in the U.S., financial risks in East European countries, and the possibility of a global flu pandemic means economists “cannot totally rule out the possibility of a W-shaped recovery.”

IE