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THE ROSY SCENARIO

Ever been on a big trip where everything just falls into place? Your flight is on time, you get bumped up to first class, your hotel room has a breathtaking view of the ocean and the weather is perfect.

Sadly, life doesn't usually work out that way.

Think of Bank of Canada Governor Mark Carney's hopeful forecast for the North American economy as that improbable dream vacation.

In Mr. Carney's scenario, all of the tools deployed by policy makers to fix the economy work exactly as they are intended.

The Herculean efforts under way in the United States, and elsewhere, to shore up the banks gain "traction" like a good set of winter tires, and credit conditions quickly ease. Record cash infusions into the banking system, near-zero interest rates and large jolts of direct government spending underpin a recovery in consumer and business spending.

And finally, U.S. housing prices bottom out in the next few months, leading to a recovery in home construction, spreading jobs and spinoffs throughout the economy.

The optimists already see light at the end of the tunnel.

Testifying before a congressional committee this week, U.S. Federal Reserve Board chairman Ben Bernanke said the central bank's unprecedented efforts to flush the system with cash are starting to pay off.

Credit market conditions have improved noticeably since the aftermath of September's collapse of Lehman Brothers Inc. A key barometer for financial sector health — the London interbank offered rate — has fallen to near 1 per cent, well down from its scary peak of 4.82 per cent last October.

Short- and long-term corporate bonds markets are also looking much healthier, providing much-needed capital for businesses of all kinds.

And in January, U.S. retail sales unexpectedly jumped by 1 per cent — the first increase in seven months. It suggests U.S. consumers may not be as hard up as everyone assumes.

Sure, 2009 will be a year of misery — for Canada, the U.S. and most of the world. But once we're through the next few months, all the economies that plunged into a synchronized global recession rise again in unison like a flock of Canada geese.

The recovery starts where it all began — in the United States. Mr. Carney expects the U.S. economy to shrink 1.7 per cent this year, rebounding nicely in 2010, growing 2.6 per cent.

And yet Mr. Carney's GDP forecasts are a full percentage point more optimistic than most private sector forecasts. Morgan Stanley, for example, is calling for gross domestic product to shrink 2.7 per cent this year, and grow a modest 1.8 per cent in 2010.

All things considered, Canada gets off pretty lightly, the way Mr. Carney sees it. The economy shrinks 1.2 per cent in 2009, before roaring back to life in 2010.

Far from being the worst crisis since the Great Depression, Mr. Carney sees Canada bouncing back much faster than it did from previous recessions — in 1981-82 and 1990-92.

How, you ask? The Bank of Canada says it has such a firm grip on inflation that low interest rates work exactly as intended, offsetting the effects of the recession and driving the recovery.

As the U.S. recovers, Americans drive demand for our oil, lumber and potash, and eventually our cars and BlackBerrys too. More demand, from China and elsewhere, also means better prices for the resources Canada produces.

What's more, Canada goes into the recession in better shape than most countries. Its banks are relatively sound, there's no toxic mortgage mess, corporate balance sheets are healthy and Ottawa has its fiscal health in order after years of budget surpluses.

Now to be fair, Mr. Carney isn't alone in this view.

"Canada has done more than survive this financial crisis," Newsweek international editor Fareed Zakaria writes in the magazine's current issue. "The country is positively thriving in it."

For Mr. Carney and the glass-half-full crowd, there's no talk of Depression. Economist Paul Kasriel of Chicago-based Northern Trust points out that a careful reading of history makes it clear this isn't the 1930s, when bungled policies, including rampant protectionism and tax hikes, made things much worse than necessary. This time, policy makers are making the kinds of choices that will result in "increased real economic activity in the short run," according to Mr. Kasriel. Never underestimate the impact of massive tax cuts, an orgy of infrastructure spending and a central bank printing money at high speed.

So forget the doomsayers and embrace the power of positive thinking.

"The same pundits who did not see this downturn coming will not see the recovery coming either," Mr. Kasriel points out.

THE GLOOMY SCENARIO

Nobody likes the guy who kills the party.

Meet Nouriel Roubini, 50, New York University economics professor and Turkish-born son of a rug merchant.

The New York Times has dubbed Prof. Roubini "Dr. Doom" for his apocalyptic predictions of where the global credit bubble would lead us.

In early 2007, Prof. Roubini ominously predicted in his widely read blog that the "party would soon be over." He talked about a stock market collapse, a wave of bank failures, up to $2-trillion (U.S.) in losses for U.S. financial institutions and a severe recession.

Fellow economists dismissed him as crank. But that was when the Dow Jones industrial average was at 12,500 points, U.S. home prices were 25 per cent higher, Lehman Brothers was a thriving investment bank and most of the economics brain trust was calling for a soft landing.

So how's Prof. Roubini feeling now? Gloomier than ever.

The crank has become an oracle. He warns of an "L-shaped, near-Depression" that extends well beyond next year — not unlike what Japan experienced in its lost decade of the 1990s.

It's not yet his most probable forecast. But he says the odds of a lengthy and severe economic dive are now at 30 per cent. Those odds go up if easy money from the Fed and the stimulus package don't work, or the budget deficit becomes unsustainable and households can't pay down their huge debts.

"Even if the U.S. were to do everything right and fast enough, we would still have a severe … recession until early 2010, with a weak recovery of growth," Prof. Roubini argues. "But if the U.S. does not do it right, this U.S. and global recession may turn into a nasty multiyear L-shaped, near-Depression like the one experienced by Japan."

The way Prof. Roubini figures it, the recession is only half over. Unemployment will soar toward 10 per cent by mid-2010 from 7.6 per cent now, and stay punishingly high for some time. And for the next several months, expect 400,000 to 600,000 U.S. jobs to vanish every month.

U.S. real estate prices will fall another 20 per cent, on top of the 25 per cent decline we've already seen. Housing starts, after tumbling 75 per cent, will decline another 20 per cent. His reasoning is simple: All those layoffs, tighter credit conditions and lost stock market wealth have created a vicious cycle that puts more homeowners upside-down on their mortgages.

As a result, he argues, the number of U.S. underwater mortgages — households who owe more on their mortgages than their homes are worth — could more than double to 25 million from 12 million now. That would wipe out as much as $4-trillion worth of wealth, or roughly equal to what's already been lost.

Following the money chain, bank losses will peak at $3.6-trillion, and we're not even half-way there. U.S. stocks, already down nearly 50 per cent, could fall another 20 per cent. That virtually guarantees that one or more of the surviving big U.S. banks will fail, or be swallowed by a rival (Bank of America or Citibank, perhaps?).

Prof. Roubini says the United States is headed for a 3.4 per cent drop in GDP this year, followed by just 1 per cent growth in 2010.

Compare that to the Bank of Canada's Mark Carney, who expects minus 1.7 per cent this year and a 2.6 per cent rise next year.

If Prof. Roubini is right, the likelihood of Canada bouncing back strongly in 2010 is remote. Canada's export-driven manufacturing and natural resource sectors will remain depressed for much longer; perhaps years. Commodity prices may stay low for much longer than analysts expect, causing further havoc in the oil sands, B.C.'s forests and from Port Alberni, B.C., to Port aux Basques, Nfld.

There will also be destructive price deflation, particularly as China joins the global economic downdraft. Once an engine of demand for commodities, such as oil and iron ore, China's trade-driven economy is in headlong retreat, with exports and imports crashing. Chinese imports plummeted 43.1 per cent in January from a year earlier, signalling that the country won't be the engine of global growth any time soon.

Worse, China risks instigating a global trade war if it moves to devalue the yuan in a bid to boost employment and keep its economy growing. That would likely incite a protectionist backlash in the U.S., Europe and among its Asian neighbours.

Simon Johnson of the Peterson Institute for International Economics in Washington says the global economy will remain stagnant in 2010, and suffer numerous false starts for years thereafter.

"A lost decade for the world economy is quite possible." Mr. Johnson warned. "There will be some episodes of incipient recovery, as there were in Japan during the 1990s, but this will prove very hard to sustain."

Far too much of the world's capital is tied up in the financial services industry, starving more productive sectors, such as manufacturing and health care. Until that trend is reversed, the global economy will struggle to find a new engine of growth.

THE MIDDLE-OF-THE-ROAD SCENARIO

When economists prepare their forecasts, they typically model various probabilities — a best-case, a worst-case and a baseline scenario.

If the pessimist is convinced the worst is still ahead and the optimist sees a silver lining in even the worst news, the middle-of-road crowd is firmly convinced the recovery is coming. It's just not here yet.

They dismiss talk of a Depression and Japan's lost decade. At the same time, they don't embrace the notion that recovery will come easily.

Mark Zandi, chief economist at Moody's Economy.com, might just be U.S. President Barack Obama's favourite economist these days. He argues that the Obama administration, Congress and the Fed are on the right track with their two-pronged attack of powerful stimulus and more aggressive efforts to shore up the banks.

"The economy is expected to stabilize by year's end," Mr. Zandi says. "But this depends on a multitude of things going reasonably right, and on policy makers' ability to implement their plans quickly."

Fiscal stimulus will create or save as many as three million U.S. jobs and keep unemployment 1.5 percentage points lower than it otherwise would be.

"The plan is reasonably well structured," Mr. Zandi says of the Obama administration's stimulus plan.

The Treasury Department's public-private scheme to purchase bad assets from financial institutions and "stress test" troubled institutions should help stabilize the financial system, Mr. Zandi adds.

Even then, the recovery will be long, hard and a lot more costly. There will be more job losses, further depressing consumer spending.

The banks will need a lot more capital to weather the recession. Millions more Americans will lose their homes to foreclosure.

Mr. Zandi's says the enormity of the challenges still facing the U.S. will wind up costing taxpayers a lot more — perhaps another $500-billion (U.S.) beyond what's already been committed. Americans must accept that the $800-billion-plus stimulus plan and the $700-billion Troubled Asset Relief Program will have to be much larger.

He figures the final taxpayer tab could top $2-trillion, or nearly 14 per cent of GDP. That's about 10 times the cost of the savings-and-loan mess of the 1980s.

Like many economists, Mr. Zandi expects the U.S. to turn the corner later this year, after a couple of rough quarters. In the end, the economy will shrink about 2.5 per cent this year, rebound to grow 1.5 per cent in 2010 and then take off at a rate of 4.5 per cent in 2011.

"If we do get the stimulus, if we do get financial stability, I'm hopeful that by this time next year we'll have a more stable economy and a more stable jobs market," Mr. Zandi predicts.

The other pole of global economic growth could come from China.

For Canada, that means any significant lift for exports and commodity prices won't likely come until half way through next year, or a full year later than the Bank of Canada's Mr. Carney envisages.