U.S. likely to beat out Canada in economic growth this year, economists say

And as unlikely as it seems, it’s the United States — the land of crippling trade deficits, high unemployment and government debt — that’s likely to relegate Canada to second place, if not third behind Germany.

Don’t look now, they say, but the U.S. is likely to beat out Canada in economic growth this year and leave its northern neighbour at the starting gate in terms of jobs creation.

“We are going into a period of catch-up where it looks like the U.S. is doing better because they will be growing faster, on the jobs front perhaps most starkly,” says Douglas Porter, deputy chief economist with the Bank of Montreal.

On many fronts, the switch has already begun.

Last week’s employment reports from both capitals is the most graphic example. The score was 2,300 jobs added in Canada in January versus 243,000 in the U.S. Even after allowing for the fact that Canada is one tenth the size of the U.S., that’s more than 10 times more jobs created in relative terms.

The trend on the jobs front has been going on for some time. Despite all the bad news emanating from south of the border, employment has been rising in the U.S. at twice the rate in Canada for a year, 1.5% as opposed to 0.7% in Canada.

Many economists expect U.S. economic growth as a whole to outpace Canada’s in 2012 as well, for the first time in seven years.

In the fourth quarter of 2011, the U.S. posted a gross domestic product expansion of 2.8%, while Canada’s is now projected to come in at 1.5% when the final tally from Statistic Canada is published at the end of the month.

All this will make messaging from Canada’s federal government more difficult, after years of declaring proudly and with some justification that Canada has led the major advanced economies in growth and job creation.

In the House of Commons on Monday, Finance Minister Jim Flaherty stuck to the familiar script when under attack for Canada’s lacklustre job creation of late.

“There are more than 610,000 net new jobs in this country since the end of the recession in July 2009,” he told his tormentors during question period.

But taking note of the changing dynamics, CIBC chief economist Avery Shenfeld issued a paper Monday posing the question: “Who has the bragging rights?”

Surprisingly, given the expectations, Shenfeld’s conclusion remains Canada although he agrees that the messaging will need to be less strident and more nuanced.

“We still have a lead, but it’s narrowing,” he said. “We did much better than them during the recession and don’t have as much slack to fill, but it does look like the U.S. is starting to play catch-up.”

The employment numbers are a good indicator of where the two countries stand, despite what the recent trend shows.

While U.S. jobs growth has been twice that of Canada’s over the past 12 months, it is also true that the U.S. lost twice as many jobs in relative terms during the recession, and will need several more years of steady growth just to return to pre-slump levels. Canada did so about a year ago.

Shenfeld says the true measure of the Canadian and U.S. labour markets is not the jobless rate — which shows a slim 7.6 vs 8.3% advantage for Canada — but the employment rate, which more accurately captures the number of discouraged workers by measuring how many working age people are employed.

By that metric, Canada leads the U.S. by more than three full points — 61.6 to 58.5% — even though both had similar rates prior to the recession.

Similarly, Canada’s GDP has caught up to pre-slump levels in nominal terms, whereas the U.S. may be growing faster at the moment, but is still not back to its pre-recession peak.

Another important area of relative strength between the two countries is housing. Shenfeld notes that Canada’s is near peaks, but because it is now flattening out is not adding to economic growth. In the U.S. home construction remains near Great Depression levels, but because it is rising from the ashes, it is contributing to growth.

“Almost from any standpoint, there’s no question Canada is operating at a much higher level,” agreed Porter. “But basically we are going to be in a period of catch-up where it looks like the U.S. is doing better because they will be growing faster, possibly for a number of years.”

Shenfeld believes U.S. superiority in growth rates may be more short-lived than Porter, reasoning Washington’s greater need to bring down sky-high deficits will add greater drag starting next year.

Regardless, Canadians should be rejoicing rather than lamenting being No. 2 for awhile, added Porter.

Despite the emergence of Chinese markets, the U.S. remains Canada’s best customer. A strong U.S. recovery will boost manufacturers of autos, machinery, aerospace and other products, including wood producers.

And there are indirect benefits.

“Our financial markets tend to move in sync with theirs, and when the U.S. economy is healthier, commodity prices tend to be healthier, and our consumers and businesses are affected in terms of confidence by what is going on south of the border,” Porter explained.