The Canadian economy is beginning to display encouraging signs of recovery, federal Finance Minister Jim Flaherty said on Friday.

Speaking to a Bay Street audience in Toronto, Flaherty pointed to such factors as modest growth in consumer confidence and retail sales, and a bond market that is functioning well, as promising signs. He also noted that there have been some improvements in credit markets and job markets.

“There are some glimmers of hope, there are some encouraging signs in the Canadian economy,” Flaherty said.

But to achieve a full recovery of the Canadian and global economies, the global financial system must be fixed, Flaherty said.

“In order for the real economies to have sustainable recovery, we need to fix the banks,” he said. “Financial systems and markets worldwide need to work.”

Flaherty applauded the U.S. government’s banking system stress tests, and similar efforts underway in Germany, the United Kingdom, and other countries. He noted that the Canadian banking system undergoes stress tests as a matter of course.

He expects to see continued signs of economic improvement later this year and into 2010. In the meantime, however, Flaherty warned that 2009 would be a difficult year, particularly in terms of the impacts of job losses.

Earlier on Friday, the government announced new investments in training and education for workers hit by the economic downturn. These new funds will play an important role in helping Canadians through the remainder of the year, Flaherty said.

“This is vitally important,” he said, explaining that going forward, sectors such as auto manufacturing and forestry will be smaller, resulting in many displaced workers. “We’re investing more than $1 billion of your dollars to help people retrain.”

Flaherty expects the manufacturing sector to represent a proportionally smaller part of the Canadian economy in the years ahead. It could shrink to roughly 14% of the economy from its current level of 17% as services industries expand in scope, he said. Still, he is confident that the manufacturing sector will continue to thrive.

“We will have a strong manufacturing sector in Canada,” he said.

In response to an International Monetary Fund review of Canadian economic policies released on Friday, which states that the Canadian government is well-positioned to provide additional economic stimulus, Flaherty said the government would consider such action if necessary.

“I agree with the IMF,” he said. “We went into the recession with a strong fiscal situation…so it puts us in good shape if more were necessary.”

But having passed the budget bill only two months ago, Flaherty said it is too soon to determine whether further stimulus measures will be necessary.

“We’re just getting the stimulus money into the economy now,” he said. “We’re going to watch and see how that goes during the first quarter.”

Next month, the government plans to release a report on the state of the economy and the progress made so far in terms of economic stimulus and the extraordinary financing framework that has been introduced.

IE