OTTAWA -- The small-business sector is expected to lead the surge for an improving Canadian economy over the next 12 to 18 months, a new report says.

The report, produced by TD Economics, says the Canadian economy ground to a "virtual halt" in the second quarter of this year but is expected to pick up significantly in the final half and into 2004.

As is often the case, small business is expected to lead the way up -- in the same way it is often at the front of the pack when a downturn approaches, the report said.

"The stage is set for a rebound in Canadian economic growth that will likely see many smaller businesses outperform medium- and larger-scale businesses in late 2003 and early 2004."

The TD report quoted a Canadian Federation of Independent Business (CFIB) review that found that the small-business sector's expectations for its own prospects declined in four of the past five quarters.

There are good reasons, the report said, to expect the Canadian economy to enjoy a resurgence in the coming months:

Significant monetary and fiscal stimulus in the United States, Canada's largest customer.

The expected fading of the impacts of SARS and mad-cow disease.

Expected progress in the Canada-U.S. dispute over softwood.

Improved prospects for farmers.

Despite all of that, the report says the appreciated Canadian currency will likely keep growth down to an annualized pace of about 2 per cent. That's a big improvement over the first half of the year, but far below the Bank of Canada's long-term target of 3 per cent annual growth.

The economic expansion should pick up steam in 2004, TD said, with real gross domestic product gaining 3.3 per cent over the year.

"The prospects for a renewed acceleration in Canadian economic growth are good," concluded TD economists Craig Alexander and Eric Lascelles.

Garth Whyte, executive vice-president of the CFIB, said he agrees that the outlook for small business is fairly strong, but warned that many entrepreneurs have been battered by at least one of SARS, mad-cow disease, a fluctuating currency, and rising insurance costs. "There's a cautious outlook, but some pockets have been hit really hard."

Insurance costs have been the most widespread problem for small business, Mr. Whyte said, with premiums doubling or tripling in a year or two in some cases.

The TD report says businesses with fewer than 100 employees -- about 95 per cent of all Canadian companies -- account for about one-third of the "real" Canadian economy as measured by gross domestic product (excluding public administration). The small-business sector also accounts for about 40 per cent of all working Canadians or about five million people.