Canada managed to navigate its way through the Great Recession of 2008 without much damage, but the time for self-congratulation may be over.

There are a number of hazards on the horizon, including the withdrawal of government stimulus, rising interest rates and the stubbornly strong loonie is stifling exports.

Canada—indeed, the world—still has some challenges to deal with in this economic recovery, said Glen Hodgson, senior vice president and chief economist, The Conference Board of Canada, speaking at the CIFPs 9th Annual National Conference-2011, in Ottawa.

“We do know oil prices and food prices are high now and will stay high for a long time to come, and therefore inflation is making a comeback,” he said.

The world, said Hodgson, is witnessing a two-speed recovery. “The low-speed is the industrial countries; we used to be the ones in charge, but we are not any more,” he said. “The high-growth countries are now the emerging markets.”

Japan is growing at an annual rate of about 1.5%, plagued by a shrinking population and a rigid economy. Europe is getting old fast, is beset by a rigid labour market and has a huge public debt problem. North America is a 3% growth world, but the U.S. has a huge fiscal problem that it has to deal with, said Hodgson.

“Now contrast that with Latin America and Asia, which are growing at 6% to 8% annually,” he said. “Incomes in China have more or less doubled in the last 10 years and are expected to double again in the next 10 years.”

The tectonic plates of the global economy are shifting dramatically. The rules have changed and “we have to find a way to recognize that as the future.”

He stressed the need for investors to look beyond traditional investment destinations. “We can’t just focus on the U.S. or Europe anymore for investment,” he said. “We really have to focus on everything around us as a source of great economic growth potential.”

In any global economic debate, comparisons between the U.S. and Canada are to be anticipated. “Compared to the U.S., the story in Canada is quite different and much better,” said Hodgson. “We and Australia are the two exceptions that got through the recession pretty much unscathed.”

Those closely watching the global recovery from the Great Recession know the Australian economy never actually contracted, thanks to massive exports to China. Canada, on the other hand, did slip into recession briefly because it remains inextricably linked to the U.S. economy.

“But we’ve had a pretty good bounce back; we recovered all the jobs we lost,” said Hodgson. “We are looking at growth of only 2.4% this year, because we think this is a year of deleveraging in Canada—for households, individuals and governments—where we have to start to save a little bit [and] make sure we can pay our bills.”

If it’s any consolation, “this is real growth, we will get better next year.”

Inflation is on the rise and it’s just a matter of time before interest rates will rise.

“We have seen inflation building up; at some point our country would have to increase interest rates, but not quite yet,” said Hodgson. “The Bank of Canada is waiting right now until the global situation clarifies a little bit, but because core inflation in Canada is above the 2% benchmark, the BoC will have to start increasing rates.”

Canada has gone through truly exceptional monetary conditions the last couple of years and that can’t go one forever. But it won’t be without consequences.

“The rate increase will further put [upward] pressure on the dollar and as a result the loonie may jump by a cent or two.”

The rising interest rate environment, he said, will not be limited to Canada. “It’s now a global phenomenon; these are really extraordinary times in terms of monetary policy.

“We are having a return of private investment—very strong investment demand in emerging markets and on top of that the Americans are borrowing a trillion dollars a year, the Europeans are borrowing huge amounts of money. All of that points to a rising interest rate environment across the curve for some time to come.”

Jim Flaherty and Mark Carney have been warning Canadians for the past year and a half to prepare for rising rates, because they know many people are over exposed.

“If I were giving you advice, I would try and find as many ways to lock-in in the current environment as possible.”

There does, however, remain the challenge of rebalancing budgets across the country. The work has begun. “We actually have three provincial governments right now that are balancing their books,” said Hodgson. “They have gone through the recession, through the recovery, and they’re at the point of having fiscal balance.”

Most other provinces, he added, have a pretty clear plan to get back to balance.