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Despite the fact that we're emerging from a global recession, the road ahead could be bumpy

<< - TD believes that the Great Recession has ended; world economy expected to expand by 3.8% in 2010 - Strengthening financial markets, along with rebounding housing markets, industrial production and consumer spending underpin the recovery - But, recovery will not be quick or easy - Recovery remains fraught with risk, leaving the world economy full of uncertainties. Analysts and investors must be fleet of foot to adjust to evolving circumstances and risks. >>

TORONTO, Dec. 17 /CNW/ - A report published today by TD Economics says there is strong evidence that the Great Recession has ended and that the world economy will expand by 3.8% in 2010. The recovery will likely be neither quick nor easy and there can be no certainty regarding the course it will take. "The global economy and recovery remain fraught with risk," notes TD's Senior Vice President and Chief Economist, Don Drummond.

Signalling the End of the Recession

The real signal that the world was emerging from recession came when North America posted growth in the third quarter, following rebounds in Asia, France, and Germany in the second quarter. Although Canada's economy grew by the slimmest of margins in the third quarter, the recovery will become much more evident when growth of around 4% is recorded for the fourth quarter.

"So far, the global recovery has been underpinned by strengthening financial markets, as well as rebounding housing markets, industrial production and consumer spending," says Drummond. "To this point, it's been a well-synchronized dance."

Fragile Recovery Underway

While the recovery is underway, the report suggests that it will not develop the "head of stream" that was typical of past recoveries. As a rule of thumb, growth in real economic output during the first year of a recovery is generally two to three times greater than the decline in output was over the course of the recession. But when a recession is driven by a banking crisis, as was the recent global recession, an economy's output grows more slowly for a number of years after the recovery has taken hold than is typically the case.

A number of factors are responsible for this slow recovery, particularly in the U.S. from protracted employment losses, deep reductions in household income and wealth, the destruction of credit flow, and risk aversion among financial institutions. In taking these factors into account, the TD Economics report forecasts growth for the U.S. at 2.7% in 2010. Canada is also forecast to grow at 2.7% next year.

These projections are predicated on a number of conditions unfolding, including continuing, albeit slow, progress in the U.S. housing market and the coincidental rebuilding of household balance sheets, and thus savings, within developed economies.

"The road to recovery for the global financial system will not be free and clear of further pain," says Drummond, "but, ultimately, additional disturbances will be absorbed." For example, the U.S. commercial real estate market will contract through 2010, likely placing a number of small financial institutions in distress. However, the effect on global, systematically important financial institutions and the broader economy will be far more limited than the recent residential mortgage market debacle.

Risks to Recovery

There are, however, a number of risks that could impede recovery. Central banks will have to act with surgical precision when they remove monetary stimulus or they may further slow down - or even reverse - the progress. Fortunately, there is enough slack in the global economy to allow central bankers to take careful corrective action without undermining the recovery process.

Another major risk lies in the steps fiscal authorities will have to take to gain credibility in order to address soaring deficits and debt. They will need to avoid acting so dramatically as to kill off either their domestic economies or impede the global recovery. The precise shape of future international financial regulation is uncertain, as are the timing and the trickle-down impacts to the economy and financial system. The TD report is based on the assumption that the financial regulators will make the right decisions.

"In many ways, successfully negotiating economic recovery is a bit like a Goldilocks scenario," says Drummond. "It can't be too hot or too cold - it's got to be just right. But it would be foolish not to keep in mind the various risks involved. Analysts and investors will need to be fleet of foot to adjust to evolving circumstances and risks."

TD Economics' Quarterly Economic Forecast can be found at

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