OTTAWA – The Bank of Canada is painting a bright face on the country's economy, suggesting the worst recession in decades is about to give way to a robust recovery.

Expressing new-found optimism, the central bank said yesterday that low interest rates and massive government pump priming are bringing the economy back to life.

Bank Governor Mark Carney acknowledged that Canada's economy will contract this year by 2.3 per cent, its worst performance since 1982. But even that forecast is a significant improvement on his previous prediction in April of a devastating 3 per cent contraction in 2009.

Beyond that, the bank foresees an economic renaissance, with growth hitting 3 per cent next year and rising to 3.5 per cent in 2011. In April, Carney was saying the economy would expand by just 2.5 per cent next year.

Carney's rosy assessment was seen as a message from the bank that the worst is over in a recession that has battered manufacturers and cost 400,000 jobs.

"It sounded like they wanted to say `Ding dong, the recession's dead,' but they didn't quite come out and say it," said Doug Porter, Bank of Montreal's deputy chief economist.

Judging from the bank's outlook, Porter said the economy might begin to see a modest return to growth in the July-through-September period.

In its forecast, the bank said: "There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system."

In keeping with expectations, the central bank left its key interest rate unchanged at 0.25 per cent. Barring runaway inflation, Carney plans to leave the rate at that historic low until mid-2010 to help spur a return to healthy business conditions.

Carney's forecast of 3 per cent growth next year puts him out on a limb relative to private sector economists, who are expecting more modest growth of about 2 per cent in 2010.

"It's a pretty optimistic number compared to what other people are looking at," said Dale Orr of Economic Insight.

Orr said this kind of optimism by the central bank is risky because Carney, in an attempt to head off inflationary pressure from a rebounding economy, might start raising interest rates too soon. If so, it could choke off recovery, he said.

Explaining its upbeat outlook, the bank said: "Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth."

But the bank cautioned that the recovery is "nascent" and warned that governments should not drop their guard by beginning to dismantle economic stimulus programs.

While the bank's overall outlook may be bright, the details offer little comfort for Ontario.

Carney said the recovery will not be as strong as it could be because of the negative impact of underlying changes in Canada's economy as traditional manufacturing industries suffer. Also slowing the return to growth is the upsurge of the loonie on exchange markets, the bank said.

The Canadian dollar, which sank as low as 76.98 (U.S.) cents in March, has been on a tear. Yesterday, it closed at 90.33 cents (U.S.), down 0.02 of a cent from Tuesday.

"The higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth," the central bank noted.

Economists note that the brunt of the restructuring in the manufacturing industry – and the accompanying loss of jobs – is being felt in Ontario. And the province's economy, which depends heavily on exports, suffers more than other regions when the rising value of the dollar makes Canadian products less competitive in foreign markets.

That means that, even if Carney's upbeat forecast is correct, Ontario could be the last province to witness an economic bounce back.

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"We could see a lopsided recovery regionally, that's quite possible," said BMO's Porter. "The resource-rich areas could come back relatively quickly while Ontario is still struggling and unfortunately, that may well be the shape of this recovery."

He noted, however, that such a prognosis could prove overly negative if the U.S. economy rebounds powerfully and improves Ontario's prospects.

Carney will provide more details tomorrow when the bank issues its quarterly report on the economy. The next scheduled interest-rate setting is Sept. 10.

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