Economic recovery is already underway, both in Canada and in the U.S., most economists say. And although growth won’t be booming, it should be sufficient to decrease unemployment levels — albeit at a very slow rate.

Still, there are some economists who think the U.S. is in deep trouble and is likely to grow little, if at all, for quite a while. This group argues that both the U.S. government and American consumers have to dig themselves out of mountains of debt before healthy growth can resume.

One such observer is David Rosenberg, chief economist and strategist with Gluskin Sheff & Associates Inc. in Toronto. He believes it will take at least five years — and maybe as long as 10 years — for the U.S. to clean up its fiscal mess. In addition, he expects the U.S. unemployment rate to climb to 12%-13% in 2010. This is well above the forecasts of nine other economists surveyed by Investment Executive, who expect an average rate of unemployment of 10% for the U.S.

The average forecast among the surveyed economists for Canadian real gross domestic product growth is 2.5% for 2010 and 3.2% in 2011, with U.S. real GDP rising by 2.8% and 3.1%, respectively. Although these are very similar growth rates, the way the recession hit the two economies was very different; the result has been much more pain in the U.S., in terms of unemployment rates.

The U.S. unemployment rate has more than doubled in less than three years, rising to 10% in November 2009 from 4.4% in March 2007. In Canada, the jobless rate rose to 8.5% from 6.1% in that same period.

The reason for the U.S. lagging is that consumer spending, which generates many jobs, has been much weaker in the U.S. than in Canada, even though export growth, which doesn’t require as many workers, has been better in the U.S.

The global recession started in the U.S. when the domestic housing bubble burst, destroying the value of many subprime mortgages. The slowdown then spread globally, both because of the impact on American consumers’ spending — on which many other countries depend, in terms of exports — and because many European and British banks had held a substantial amount of U.S. subprime mortgages.

Thus, for countries such as Canada, the recession was an exogenous event and relatively easy to handle. Although Canada’s export growth was affected, domestic demand didn’t plunge and our banks did not have enough U.S. subprime mortgages to be badly hurt; as a result, Canadian banks have continued to lend, something many U.S. banks are still hesitant to do.

“Efforts to raise capital requirements and reduce leverage in banks in the U.S. and Europe could mean an extended period of tighter than normal credit in bank lending,” says Avery Shenfeld, chief economist with CIBC World Markets Inc. in Toronto. This is an issue particularly for small and medium-sized businesses, he adds, because “the corporate bond market is doing an admirable job filling in that gap for larger companies.”

There are concerns that defaults in commercial real estate in the U.S. could create new problems for U.S. banks, making them even more hesitant to lend. There’s also some concern that a real estate bubble is developing in Canada because low interest rates are making it very inexpensive to take on a variable-rate mortgage.

When rates go back up, so will the interest payments on these mortgages. But house prices fell slightly in November 2009, and a survey by Royal LePage that same month found that significant numbers of consumers are wary about purchasing property.

Canada has also benefited from the quick recovery in China and other Asian countries, excepting Japan, and the resulting rise in resources prices. Those countries have been able to stimulate domestic demand to help make up for the drop in their exports to the U.S. China, in particular, has put in a big stimulus package that its communist government implemented very quickly, which has gotten the country’s GDP growing again — at an annualized rate of 8.9% in the third quarter of 2009.

Asian countries generally have significant foreign-exchange reserves as a result of big trade surpluses, which have enabled them to spend without racking up the big debt loads that industrialized countries will have to deal with once economic recovery is firmly underway.

Canada, like many other countries, had developed a large stimulus package to get the economy moving. We were in much better shape to go forward with it because our government finances were far more solid than those of most other industrialized countries. But, because Canada is a democracy, the stimulus has taken longer to implement; thus, a good deal of its impact will be felt in the first half of this year.

The trick for Canada — as with the U.S. and other debt-burdened industrialized countries — is when to reverse the fiscal spending and stop the increase in debt.

The timing and degree of fiscal tightening has to be balanced with what the Bank of Canada does on the monetary side — and also has to take into account the level of the Canadian dollar. The loonie has risen with the recovery in resources prices, and that acts as a brake on the economy because it makes exporters — particularly manufacturers in Central Canada — less competitive.

Nevertheless, some increase in interest rates is expected this year, although the majority of the rate hikes are expected in 2011. The average forecast for Canadian 91-day treasury bills is 1.2% at the end of 2010 and 3% as of Dec. 31, 2011, vs the recent 0.2%.

The U.S. is likely to move later and not increase rates by quite as much. The average forecast for its 91-day T-bill is 1.2% at yearend 2010 and 2.8% for yearend 2011, vs the recent 0.3%.

Long rates are expected to edge upward, but not by much. The average forecast for 10-year government bonds is 4.5% in Canada and 4.6% in the U.S. at the end of 2011.

Most economists expect the C$ to remain high relative to the U.S. dollar for the foreseeable future, but there are a few analysts — such as Lloyd Atkinson, an independent financial and economic consultant in Toronto — who think it will fall. Atkinson argues that the US$ will start appreciating again once it’s clear that the U.S. is on the path to growth — even if that growth is relatively modest compared with previous recovery periods.

Atkinson believes the U.S. recovery will surprise most analysts. In his view, they are discounting the resiliency of the U.S. economy and U.S. companies’ ability to increase productivity. He believes U.S. firms will emerge from the recession leaner and meaner than ever, noting that U.S. non-financial corporations don’t have much debt, so they will be well positioned to take advantage of growth-related demand.

At the same time, Atkinson does not view Canada’s prospects as being as bright as most other analysts do. He thinks Canada’s poor productivity record will continue to drag GDP down, and he’s dismayed by the size of federal and provincial deficits resulting from stimulus-related infrastructure spending.

Atkinson’s analysis shows that we are piling on much more debt than the U.S. because state and local governments south of the border are currently cutting back on their spending as they aren’t allowed to run deficits.

Generally, the economists surveyed don’t foresee much risk of deflation in the near term or of inflation in the medium term, although there is some risk.

Doug Porter, managing director and deputy chief economist with Bank of Montreal’s capital markets division in Toronto, views “deflation as the greater risk — at least, until the U.S. household deleveraging is complete.”

However, Paul Ferley, assistant chief economist withRoyal Bank of Canadain Toronto, says: “All the liquidity in the system will prevent deflation.”

Only Rosenberg foresees deflation; indeed, he says, the U.S. is already in deflation in the industrial and consumer products sectors.

Inflation is not a risk globally in the next two years because of the enormous degree of spare capacity in the economy. Inflation is more of threat in the medium term because of all the money that central banks are printing, which could lead to too much money chasing too few goods if the cash is not withdrawn quickly enough.

Most economists, though, believe the central banks will get their exit strategies right. However, Beata Caranci, director of economic forecasting with Toronto-Dominion Bank’s economics department in Toronto, warns: “The untraditional nature of current monetary policy raises the risk that late or incomplete withdrawal of monetary stimulus leads to a period of rising inflation into 2012 and beyond.”

Adds Shenfeld: “The U.S. might be tempted to inflate its high debt-to-GDP ratio, pay off foreigners in a devalued currency and lift house prices with inflation so they are closer to the mortgages written against them. But that would be a policy choice and is not inevitable.” IE