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OTTAWA — Canada's economic recovery is likely to be far stronger than markets anticipate, a Bay Street economist forecast Wednesday, indicating that a "burst" of 10 per cent growth is possible in the coming quarters.

The prediction from Sheryl King, chief economist and strategist at Merrill Lynch Canada, comes amid fierce debate over what shape the recovery will take following the deepest recession since the Second World War. "Markets think we are going to get this gradual rise in growth, and then everything is going to be fine," King said in an interview. "But business cycles never end like that. You usually get some pop in growth."

Those who argue that a strong rebound is in the offing were handed a key piece of evidence Wednesday when major U.S. credit-card providers, led by American Express Co., reported defaults and delinquencies were less than expected in June. This might signal that U.S. consumers' credit positions — up until now, the missing piece in the U.S. recovery puzzle — are not deteriorating as rapidly as feared, despite rising unemployment and the continuing housing slump.

King's bullish call is based on surprisingly positive results from two Bank of Canada business surveys released on Monday. They showed firms are the most optimistic about future sales in almost a decade, and obtaining new loans is becoming less difficult. Since the release of those reports, the Canadian dollar has added nearly four cents to its value, closing at a one-month high of 89.74 cents US for a one-day gain of 1.71 cents. Further, Canadian data on Tuesday suggested the market for existing-home sales has recovered in earnest with stunning month-over-month and year-over-year gains. King said historical data suggest a strong correlation between the central bank's survey results and GDP growth.

Hence, the results this week imply the country is headed for year-on-year growth of about 4.25 per cent, which would require a quarter or two of 10 per cent growth as near-term weakness is expected due to auto industry shutdowns. Her short-term forecast differs sharply from most other Bay Street analysts, who have generally said the recovery would be slow and protracted.

Under King's scenario, the Canadian economy could grow 10 per cent in the fourth quarter and 7.5 per cent in the first three months of 2010, before settling down.

She added that monetary stimulus, in the form of record-low interest rates, is "bubbling" underneath the surface and set to engineer a "burst" in growth.

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