Analysts at UBS have upgraded their forecast for the Canadian economy — they now see a V-shaped rebound, rather than the U-shaped recovery they had been expecting.

In a research note, UBS Securities Canada Inc. announced that it has raised its forecast for Canadian GDP growth in 2010 from 2.4% to 2.9%, which, it notes was already above the consensus prediction of 1.8% growth.

“We expect growth to resume in [the third quarter of 2009], although most won’t feel the economy has ‘recovered’ until activity levels are closer to mid-cycle, which is not likely until 2011,” it says.

The firm cites improving financial market conditions as the primary reason for its rosier outlook.

“The increased signs of economic stabilization, including August’s employment jump, are not the basis of our upgrade, as they do not provide any unique insight about the ultimate shape of the recovery,” it explains. “Instead, what is more compelling is the rapid turnaround in financial conditions, with the Bank of Canada’s index at the highest level in its 10-year history. Importantly, yield curves (whether government, corporate or both), which typically lead the economy by a year or more, are tremendously positive.”

If this downturn proves to be a “double-dip recession”, as governments withdraw their massive fiscal stimulus efforts, that second dip isn’t likely to come until 2011, UBS says.

“In addition, sharp drops in GDP typically have led to strong rebounds, again not just for one or two quarters but over the next year. These factors should be more than sufficient to bridge the economy until the real effects of the stimulus start barrelling through in 2010. Indeed, G20 rhetoric has only affirmed that stimulus won’t be curtailed and central bankers have committed to keep rates low,” it adds.