TORONTO - There are more and more signals that the world's economy is on the mend after taking a severe battering over the past two years, according to observers who say the big picture is getting brighter.

Much of the credit for that goes to massive stimulus programs, economists say, with the trillions of government dollars poured into fighting the recession beginning to turn the tide.

"In the U.S., massive monetary and fiscal stimulus is beginning to gain traction and will account for the majority of growth during the next year," Scotiabank chief economist Warren Jestin said in a report Wednesday.

"Government initiatives are bolstering disposable income and spending at a time when households are focusing on reducing debt and rebuilding savings."

China is the first country to show signs of recovery, Jestin said, with the United States at the fore of developed nations.

"In this environment, emerging markets will provide a large share of global locomotion. Even in a year when global output is shrinking by nearly three per cent, China and India are expected to expand by six to eight per cent in 2009."

Although tentative and modest, expansion has also appeared in Canada. The economy recorded the first growth in gross domestic product in 11 months in June.

A survey by Canadian Manufacturers and Exporters this month found firms in a more optimistic mood about the future, with a majority of respondents saying they are no longer seeing future orders in a free-fall.

CME president Jayson Myers stressed, however, that companies still face hurdles, including a strong currency which dampens demand for Canadian products abroad, and increased protectionism in the U.S.

Jestin said Canada's economy staggered through the first half of 2008, with its much-vaunted financial system and the strength of a commodity price boom providing further insulation.

"Our nation was dragged fully into the global recession only when faltering emerging economies triggered a collapse in resource prices and export earnings," Jestin said.

"Even then, the erosion in employment, housing activity and car sales has been less severe than south of the border."

A federal Finance Department official appeared to agree with that statement Wednesday, indicating in a technical briefing ahead of a meeting of G20 finance ministers in London on Friday that he believes economies have stabilized, largely as a result of public sector stimulus and central bank policies that encourage borrowing with low interest rates.

But the official said Finance Minister Jim Flaherty will also sound a note of caution at the meeting, stressing that the recovery is not yet self-sustainable and that now is not the time to start pulling back from massive governmental stimulus.

Laurentian Bank Securities economist Sebastien Lavoie equated Canada's economy to a hockey team whose star players were suffering through "a lethargy."

"Fortunately, some of Canada's main players seem to have regained their footing this summer," Lavoie said in a report.

"Provincial governments have kicked stimulus plans into gear, while most regions experienced renewed strength in the resale housing market and a pickup in consumer spending."

"Modest" recovery is expected for most provinces during 2010 but the Canadian manufacturing-export sector is unlikely to return to normal any time soon, Lavoie said, especially with global demand undergoing a rebalancing.

Lavoie noted that most provincial deficits will be larger this year and next than initially forecast and "for several provinces, the economic recovery will not be enough to alone pull their budgets back into balance over the medium term."

That means either spending will have to be cut or taxes raised, Lavoie warned.

UBS Investment Bank said its July internal survey of global equity analysts suggested that about half expected stimulus packages will be effective in 2010.

"Looking at the survey results in aggregate, we believe the stage is set for the world economy to gradually recover, driven in part by relatively benign inflation, rolling impacts from global stimulus packages and improving credit conditions," UBS said in its report.

But about 72 per cent said they expect to see "muted" inflation in their regions over the next 18 months as the stimulus packages help drive demand and prices higher.

Latest From ...