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Global economy has a ‘long and fairly bumpy’ recovery ahead

Greece's Finance Minister Yannis Stournaras touches his head before a news conference on the liberalization of closed professions and markets at the Finance Ministry in Athens on May 9, 2013. Greek youth unemployment shot to a record 64 percent in February and consumers grew more pessimistic, underscoring the dire state of the recession-hit economy despite signs of improving business sentiment.

John Kolesidis/Reuters

Spring may have sprung, but not all economists are sprightly about the outlook for the global economy.

In fact, as a Toronto audience heard Wednesday morning, the risk of a recession in Canada is "higher than normal," the U.S. is set for "unspectacular" growth, Europe is poised for another downturn and even the BRIC countries will not be the economic drivers they had been in the past decade.

Those are the views of one of the more Eeyore-ish research firms around: London-based Capital Economics, whose conference Wednesday was entitled: "Is the world on the road to recovery?" (The answer: Sort of. But it will be a "long and fairly bumpy" road, one in which Europe is in danger of veering off).

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First, Canada. Economist David Madani has long held one of the more pessimistic views on this country, particularly around its housing market. This hasn't changed. He sees the economy growing just 1 per cent this year and 1.3 per cent next year. Unemployment will only worsen, to 7.4 per cent this year and 8 per cent in 2014, and the Canadian dollar will weaken, to about 91 cents next year.

Housing is the chief reason for his glum outlook. House prices are still overvalued, particularly in markets like Vancouver and Toronto, and ripe for a correction. Over the long-term, he sees house prices falling by 25 per cent. That in turn will curb household spending just as a slide in building activity curbs growth. While a recession isn't in his base-case scenario, the economy is "losing momentum" and the chances of a contraction are "higher than normal."

Lower commodity prices will also weigh on growth and so will weaker business investment and only moderate U.S. activity. He believes interest rates in Canada will stay low for a "very long time." His view of Canada in a word is "underperformance."

The bleak outlook isn't just for Canada. The U.S. economy won't see much of a pickup until next year, while it expects the euro zone to contract this year and next – a far grimmer forecast than the current consensus, which calls for a mild pickup next year.

The four BRIC countries, meantime – Brazil, Russia, India and China – won't repeat the strong growth they saw in the past decade. Given their clout on the global stage, that in turn will weigh on global growth.

So where, if anywhere, are these economists optimistic? Sub-Saharan Africa is one region, as civil wars decline, political stability grows and foreign direct investments climb. The firm is relatively upbeat about Ghana, Nigeria and Kenya, but not about South Africa. Mexico should outperform, and so should some Asian countries such as Indonesia and the Philippines.

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