TD Economics issued its latest forecast which sees a weak start to 2009, followed by recovery, but many worries persist beyond that time horizon.

In a report released Wednesday, TD notes that in its revised economic outlook published October 31, it put forward two forecast scenarios: base case and pessimistic. It has now adopted the pessimistic case as its base case. Under that scenario, the U.S. recession would be similar in magnitude to that seen during the 1980s and the global economy would experience the deepest recession since the data began in 1960.

The world economy is expected to expand by only 0.5% in 2009 (anything below 3% is deemed a world recession), TD says. Since much of the economic weakness is expected to come over the next six months, there is a risk that global growth will come in below zero in 2009, it says. Also, unlike past global recessions that are largely contained to a specific region, “this is a rare instance in history that we will see a synchronized global economic downturn”.

For Canada, TD says that the combination of falling export prices — meaning falling profits for exporters to reinvest in the Canadian economy — and falling real economic activity will cause nominal GDP to contract by 3.2% in 2009. “While Canada is not yet officially in a recession, we believe history will show that this will cease to be the case in late 2008 and early 2009,” it says.

TD says there are three phases to the economic outlook. “First, we project great weakness through the first half of 2009 across all major economies. Second, a solid recovery is expected in the second half of 2009 and through 2010. Third, the economic outlook can’t be seen through rose-colored glasses beyond 2010,” it says.

“A lot of imbalances will still need to be unwound, including those that afflicted the global economy before this crisis — such as the saving imbalances between countries,” it says, adding that, “In many respects the situation will have become worse, due to recapitalization, deleveraging among businesses and households and huge public sector dissaving.”

“There is no simple solution,” TD concludes. “So while we will likely get a reprieve over the next 12-24 months, a number of broader issues will continue to exist.”