TORONTO, Oct. 21 /CNW/ - While the slide into recession proved much faster, and the decline in output much deeper than was generally expected, the transition to recovery now appears to be happening much faster, and is looking to be much stronger, according to a special report released today by Scotia Economics entitled, 'What A Difference A Year Makes!'.

"The global economy is breaking free from the grip of recession," said Aron Gampel, Deputy Chief Economist, Scotiabank. "Countries that were least affected by last year's meltdown - developing nations like China, India, and Brazil, for example, and Australia among the developed ones - have already begun to register stronger growth. For other developed nations, such as the United States and Canada, that were hard hit by the economic fallout, leading financial and economic indicators are turning higher. With the global banking system coming back to life, credit is beginning to flow and the wheels of international trade are slowly beginning to turn."

Market forces are contributing to the renewed economic momentum. Lower prices are enticing households and businesses to increase their purchases, while industrial activity is gearing up to restock inventories depleted by massive production cuts and the recent improvement in sales.

But much of the credit for this improved performance is due to the extraordinary efforts on the part of policymakers, led by the United States, but internationally as well. According to Mr. Gampel, "an unprecedented and highly synchronized monetary and fiscal pulse is emanating from the major capitals around the world, with this large stimulus providing the global economy with the much-needed traction to drive itself out of a very deep hole."

"Scotia Economics now expects that the Canadian economy will continue to build momentum through 2010," continued Mr. Gampel. "We have already witnessed a rebound in domestic spending, though the drag from the external sector continues to weigh on the speed of the recovery."

According to the report, this performance dichotomy in Canada - between stronger domestic-led and weaker externally focused activity - will likely persist for some time. Although the United States is slowly emerging from its deep funk, Canada's largest trading partner faces unusually stiff headwinds on the path to stronger growth, many of which will continue to dampen Canadian exports and its longer-term performance.

Nonetheless, the generally improving economic backdrop, here at home and around the world, should provide Canada's small- and medium-sized businesses with increased opportunities to build their businesses.

-   Borrowing costs are likely to remain 'lower-for-longer', thereby
        helping to sustain the fledgling recovery.
    -   Governments throughout Canada are committed to 'pedal-to-the-metal'
        fiscal stimulus to provide important support during what will likely
        be a lengthy period of economic and financial convalescence.
    -   Canadian balance sheets are in relatively good financial shape,
        thereby enabling households and businesses to more fully participate
        in the recovery.
    -   Firms must continue to search out new opportunities in the higher-
        growth regions of the globe, led by China and India in the Asia-
        Pacific region, and Brazil in Latin America - countries less affected
        by the past year's financial contagion.
    -   Governments in Canada are continuing to lower the corporate income
        tax burden on small businesses.

In addition, "small businesses have the benefit of flexibility -- being able to adapt to change easily and take advantage of opportunities quickly," said Kyle McNamara, Managing Director and Head, Small Business, Scotiabank. "By accounting for the unexpected and building it into a business plan, small business owners are able to mitigate risk and be in a position for growth."

Small Firms = Small Job Losses

Employment at Canadian small businesses has held up far better over the past year than at the nation's largest firms. Based on data from Statistics Canada's Labour Force Survey, small firms, with fewer than 100 employees, account for 67 per cent of all paid employment in Canada. However, they represent only 37 per cent of net job losses between the third quarter of 2008 and the third quarter of 2009.

"The industrial make-up of small versus large businesses in part explains the outperformance of small-firm employment," said Adrienne Warren, Senior Economist, Scotia Economics. "Roughly, 75 per cent of small businesses operate in service industries, and have benefited from the relative strength in domestic demand at a time of mass layoffs and downsizing in high-profile export-oriented manufacturing and resource-based industries such as autos, high tech and steel."

Pent-up labour demand is another factor supporting small business employment. The primary business constraint cited by small- and medium-sized business in recent years has been a shortage of skilled labour. Smaller firms, with their relatively high recruitment and training costs as well as employee turnover, may also be more reluctant to let go of employees during an economic downturn.

"Small businesses have cushioned the decline in employment in Canada, and may well lead the recovery," concluded Ms. Warren. "Many of the expected high-growth industries over the next few years - construction trades and services, health care, environmental services, information technology, and management consulting - are disproportionately staffed by small firms or self-employed workers. Meanwhile, competitive pressures, including a strong Canadian dollar, low cost overseas production and weak U.S. domestic demand may force traditional manufacturing industries to maintain permanently leaner workforces."

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.