We have gone through a series of phases since the spring of 2008. At that time, conditions in many parts of Canada remained buoyant despite the deepening recessionary forces gripping the U.S. and deteriorating economic conditions in Europe and Japan. In part, our resilience reflected the strength of our banking system — now widely recognized as the strongest in the world — and the much stronger household and government balance sheets on this side of the border. Unlike many American families, most Canadians did not use their home equity to underwrite consumer spending, and our governments enjoyed surpluses at a time when most developed nations were awash in deficits.

Things changed in the fall of 2008 as financial markets seized up and commodity prices crashed. The cash flow from the commodity boom that fuelled job creation and massive investment in resource-producing areas, particularly in Western Canada, dried up virtually overnight. This undercut one of the main locomotives that had kept our economy going as many countries were being drawn into the global recession.

What followed was one of the most intense economic setbacks Canada, the U.S. and overseas developed nations have experienced in our lifetimes. By the spring of 2009, many Canadian businesses and households had sunk into a state of pessimism about the outlook and were assuming that things would not get better anytime soon. But, come the summer, conditions actually did begin to get better. We went from what seemed like economic freefall to a period of "bouncing along bottom" where good economic news began to appear alongside the bad news that lingered after the worst of the recession was behind us.

2. How is the Canadian economy performing now?

We are gradually moving out of the "bouncing along the bottom" phase, and in the months ahead will likely see progressively more good news and less of the bad. Financial markets remain jittery and prone to setbacks, but commodity markets have recovered alongside stronger demand, particularly from emerging powerhouses like China and India, and equities have rallied on expectations that the recovery will continue. The auto sector has gone from shutting down a large part of its production in North America to control soaring inventories in the first half of 2009 to restarting many plants to rebuild inventories as sales begin to recover. Many of the "shovel ready" infrastructure projects announced by governments a year ago during the depths of the recession are finally getting into the ground. As consumer and business confidence strengthens in the months ahead, the recovery should broaden to other sectors of the economy.

3. What are the prospects for Canada over the balance of 2010 and why do you say that the "road to recovery is not taking us back to where we were before the recession began"?

While economic momentum will continue to build through the first half of 2010, overall growth will likely moderate in the latter half of the year and beyond. Central banks will begin withdrawing the unprecedented stimulus put in place during the depths of the recession, pushing interest rates higher in the second half of 2010. Governments also will begin reining in fiscal stimulus to reduce outsized deficits. Financial reregulation will require many financial institutions to hold more capital, to reduce leverage and to tighten credit conditions for riskier borrowers. In this new environment, with lingering structural impediments to growth, the U.S. and other developed nations may be on a lower glidepath in 2011. In Canada and the U.S., growth will probably not go up more than 2.5% over the next five years on average, 2% in Europe and less in Japan.

At the same time, growth will remain much stronger in powerhouses such as China, India and Brazil. Activity in these and other emerging nations will underpin commodity markets - good news for Canada - and their rising living standards will fuel domestic demand, creating important export opportunities for Canadian industries. As the global economic landscape changes, businesses should be exploring new markets in high-growth areas to compensate for slower growth in traditional markets such as the U.S.

4. How do you think the Canadian dollar will perform in 2010?

While exchange rates are likely to remain quite volatile, rising demand for commodities and higher prices may push the Canadian dollar back to parity and perhaps beyond over the next year. In part, this also reflects the vulnerability of the U.S. dollar as the recovery takes hold and global investors diversify away from the U.S. asset positions accumulated during the financial crisis. Even though the U.S. dollar is not about to lose its status as the world's reserve currency, gold purchases by central banks in Russia, China and India highlight investment diversification away from the U.S. dollar.

Warren Jestin, Senior Vice-President & Chief Economist

As in many other nations, monetary and fiscal policy in Canada has been geared to providing essential support during extraordinarily difficult economic times. As the recovery progresses, it is essential that the Bank of Canada reduces monetary stimulus in a timely manner to forestall a revival of inflation and that fiscal policy is realigned to reverse the recent escalation in deficits.

As part of their stimulus packages, Canadian governments have been investing in improving our infrastructure and have been taking longer-term action to improve competitiveness by reducing business taxation. These measures will pay longer-term dividends by underpinning growth and job creation. But much work remains to be done. The economic revival will trigger a resurgence of the skills shortages that existed before the recession began. Our governments must make education and skills training a top national priority to ensure that Canada has a world class work force.

The aging of the population in Canada and other developed nations also will pose major challenges for governments over the next decade. Without reform of our health care system, escalating expenditures in this area will crowd out spending in other important priorities, such as education and infrastructure, and could thwart efforts to bring budget deficits under control.

6. Is there a downside to government action? There are reports that the U.S. will not be able to fund its forecasted deficits and unfunded commitments, in addition to current debt obligations.

The U.S. has the world's largest economy and has a globally competitive, vibrant business sector. After running a series of surpluses in the 1990s, overall government debt is also reasonably low. However, recent deficits have escalated dramatically and, unless corrected, will add substantially to the U.S. government's debt burden over the next five years. The U.S. also has a large trade deficit, closely related to consumer spending and the nation's dependence on imported energy. As oil and other commodity prices rise and consumer spending begins to revive, that deficit will once again begin to rise. Taken together, these twin deficits are likely to put downward pressure on the U.S. dollar and upward pressure on U.S. borrowing costs over the next two years. While neither shortfall poses an imminent risk to the well-being of the U.S. economy, their continuation would act like rust, which over time would weaken the underlying strength of the U.S. economy.

7. What are the regional differences in economic performance across Canada?

Over the next five years, growth is likely to be best in the West, lead by B.C. and Alberta, in part because of the expected strength in global demand for resources, particularly energy. Saskatchewan and Manitoba should also turn in solid performances. Energy demand will also drive growth in Quebec and Newfoundland. The Maritime provinces tend to have greater stability, with growth supported by expansion in their major cities.

Growth in Ontario will be supported by its large and diverse service sector, but restructuring in the Province's manufacturing sector is bound to temper the overall pace of expansion. A strong exchange rate, with the Loonie perhaps once again soaring to parity, high commodity prices and relatively subdued economic prospects south of the border also will pose challenges for provincial businesses. On balance, growth in Ontario may well lag the national average over the next three to five years.

8. Last year you told our readers to be cautious, but you warned that extreme skepticism would be counter-productive. What words of advice do you have for Canadians as we look ahead to 2010?

While overall growth will be muted compared to previous recoveries, economic conditions will still offer a world of opportunity for Canadians. Our domestic economic fundamentals are stronger than those in the U.S. and most other developed nations. Our banking system is regarded as the strongest in the world. Our labour market also has shown greater resilience with job losses running about half the rate of decline seen in the U.S.

New markets are rapidly opening up around the world, which require production processes or services that Canadians can offer. Businesses should be exploring these unfamiliar markets, particularly in the emerging economies, to understand how they can plug into them in a profitable way. Closer to home, new demographic trends such as the aging baby boom generation, labour market skill shortages and first generation Canadians will offer new business opportunities. Widespread action to improve energy efficiency and the environment also will generate enormous investment opportunities and jobs in the years ahead, probably creating the fastest-growing industry in the world over the next decade.

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