It’s a good news, bad news scenario: compared with past downturns, this recession is not a particularly bad one for Canada. That’s the good news.

The bad news? The recovery is expected to be slow in coming, with unemployment remaining relatively high for a number of years. Most economists expect the jobless rate to move beyond 9% this year, possibly hitting 10%. It will be many years, they say, before the unemployment rate returns to 2008’s level of 6%. Toronto-Dominion Bank’s long-term forecast pegs the jobless rate at 7.8% in 2013.

That may seem daunting but, at 10%, the unemployment rate is still well below some previous highs. In December 1982, for example, it reached 13%, which represented a 5.9 percentage-point increase from 7.1% in April 1981.

In fairness, TD’s forecast is one of the more pessimistic. But even the optimists think it will take considerable time for the jobless rate to return to 6%.

Economists blame the shrinkage of available credit in the wake of the global credit crisis. The securitization market has disappeared; lenders can no longer package and sell loans to other institutions and use the proceeds to finance more loans. Furthermore, standards for making loans have tightened, so it is harder to borrow — or, at least, borrow at relatively low cost.

That translates into less potential economic growth than would have been the case if easy credit conditions prevailed. In economic terms, the money-supply multiplier — the number of times money is reused or re-lent — has been reduced.

Stéfane Marion, chief economist and strategist with National Bank Financial Ltd. in Montreal and one of the more optimistic forecasters, believes the U.S.’s potential growth is now around 2% rather than 3%, and Canada’s potential growth is 2.25%, down from 2.75%. That means that unemployment will be higher, with what’s known as the “natural” rate of unemployment, or NAIRU, at 5.5%-6% in the U.S., up from the 4.8% assumed by U.S. authorities. (NAIRU indicates how low the jobless rate can go before inflation picks up because of excess demand.) Mario believes Canada’s NAIRU will rise to 6.5%-7%, up from his previous estimate of 6.2%.

Marion believes this lower economic growth will continue for some time, probably until there’s a productivity shock, such as a technological advance that sharply increases the amount that can be produced with a given amount of inputs.

In past downturns, Canada quickly followed the U.S. into recession, was often hit harder and usually came out of it slightly later. It’s unusual for Canada to have a shallower and shorter recession than the U.S.

But, going into this recession, the underlying fundamentals of the Canadian economy were strong. Canada, for example, hasn’t experienced the housing-price bubble the U.S. has, or the enormous number of subprime mortgages. Granted, Canada’s housing market is cooling, but mainly in the West, where the resources boom fuelled higher prices. Even Ontario, the province hardest hit by the recession, hasn’t seen plunging house prices. In addition, government finances are in much better shape in Canada.

But the biggest difference this time around, says Marion, is resources prices. They are still at historically high levels, despite recent drops. So, although Alberta and British Columbia are experiencing sharply declining output, resources prices at current levels can support jobs, incomes and corporate profits.

It may mean Alberta will have to wait before delayed oilsands projects — which need US$65-a-barrel oil — resume. Oilsands companies will want to be convinced that higher oil prices are here to stay before they go ahead. But the B.C. economy will get a boost from the 2010 Winter Olympics.

As for the other provinces, Saskatchewan and Manitoba are doing the best of the provincial economies, thanks to agriculture and food processing. Food is pretty much recessionproof; people have to eat. In fact, Saskatchewan is the only province TD expects to have positive growth this year, at 0.4%, while Manitoba’s decline of 1.2% will be less than anywhere else. (Canada’s overall gross domestic product is expected to contract by 2.4%.)

Carlos Leitao, chief economist and strategist with Laurentian Bank Securities Inc. in Montreal, notes that food processing is the one manufacturing sector in Ontario that is still growing. And TD estimates Ontario’s economy will contract by 2.7% this year.

@page_break@The Atlantic provinces aren’t having as tough a time as Ontario is. TD predicts drops in real GDP of 1.8%-2.5% for the four provinces.

Even Quebec is doing OK, says Pascal Gauthier, an economist with TD in Toronto. Gauthier expects weakness in Quebec this year to be on par with the national average. Supports include the province’s aerospace industry, a sector that hasn’t yet been hit hard; Gauthier notes that Montreal-based Bombardier Inc. went into this downturn with a completely full order book. Other factors in Quebec’s favour: a balanced housing market, infrastructure spending by Hydro-Québec, other government stimulus projects and a tax system that helps middle-income, two-children families.

That leaves Ontario as the hardest hit — a result of the restructuring of the auto industry. But the recession did not cause auto industry problems; it just exacerbated them. Leitao expects auto-assembly employment in Ontario to drop by 50% in the next 12 months to about 30,000 and be accompanied by additional job losses in autoparts manufacturing and car dealerships.

Although lower output by the Detroit 3 automakers may be offset by increased production at foreign automakers in the province, overall auto production is likely to remain low by historical standards. North American auto sales won’t return to previous highs, Marion says, making it necessary to reduce capacity substantially.

Nor are Ontario’s problems confined to autos. Leitao points to Stelco Inc. in Hamilton. The steelmaker had kept going through previous downturns, but this time it has been closed down by its foreign owners. Leitao believes Ontario missed the boat in the 1990s, believing that the low Canadian dollar meant it didn’t have to shrink manufacturing. Indeed, it increased investment in manufacturing while other regions outsourced. Now, Ontario has to catch up — and do so quickly and painfully.

Marion notes that Quebec went through the adjustment to outsourcing, particularly in its apparel industry, in 2002-03.

The TD report expects Ontario’s employment to fall by 2.6% this year and another 0.6% next year, pushing the unemployment rate up to an average 10.8% in 2010. That’s a 4.3 percentage-point increase from 6.5% in 2008.

At 10.8%, Ontario’s unemployment rate is still less than in Quebec and the Atlantic provinces. But in percentage terms, none of those rates are rising at the same pace as Ontario’s. Quebec is expected to be up by three percentage points, New Brunswick and Nova Scotia by 3.7 percentage points, Prince Edward Island by 2.3 percentage points and Newfoundland and Labrador by 2.2 percentage points.

Economists compare this downturn to the 1990-91 recession, in terms of both lost output and the drop in employment. Real GDP is expected to decline by around 3% from peak to trough, similar to the 3.1% drop in the 1990-91 recession but much less than the 4.9% drop in 1980-81. Jobs are likely to decrease by 3%-3.5%, similar to 3.3% in the early 1990s but less than 5.4% in 1981-82.

Canada was also slow to recover from the 1990-91 recession. It wasn’t until 1996 that the country recovered the lost ground. In the 1981-82 downturn, growth was already strong by 1983-84.

So, how long will it take before Canadian economic activity returns to pre-recession levels and unemployment comes down significantly?

Marion is probably the most optimistic; he expects some economic growth in the second half of this year. But given a slow recovery, he doesn’t expect the output gap to close before the end of 2010. He cautions, however, that central banks will have to worry about potential inflation as soon as growth resumes. “It’s not the level of the output gap,” he says, “but its direction that matters.”

Thus, Marion is assuming some increase in interest rates later this year, despite comments by Bank of Canada governor Mark Carney about rates remaining low through to 2010. Marion notes that the BofC is expecting a 3% drop in real Canadian GDP this year; Marion thinks it will be down by only 1.5%.

Marion’s argument is that the monetary, fiscal and credit stimulus provided by governments — as central banks buy government and, possibly, corporate debt — will lead to more confidence on the part of consumers and businesses; this will result in increased borrowing and economic activity. He believes that the rapidity with which confidence returns will surprise analysts just as much as the sharpness of the downturn in the fourth quarter of 2008 and first quarter of 2009 surprised them.

Adrienne Warren, senior economist with Bank of Nova Scotia in Toronto, also thinks the output gap could close by the end of 2010.

But others aren’t as optimistic. Leitao expects some mild positive growth at the end of this year but, like the BofC, thinks real GDP will be down by 3% this year. He also expects a slow recovery and, indeed, doubts the output gap will be closed before 2012.

Paul Ferley, assistant chief econo-mist at Royal Bank of Canada in Toronto, agrees with Leitao, expecting the gap to close by 2012.

Beata Caranci, director of economic forecasting at TD, thinks it could be 2013.

Government infrastructure programs should provide some help. And given that federal and provincial finances are generally in good shape, they can afford it. But Leitao warns that governments need to act quickly to eliminate deficits once the economy starts growing.

He particularly questions Ontario’s plan to run deficits for seven years. “No government should fight deficits during the next two years,” Leitao says. “But beyond that, the need to do so needs to be re-examined. It’s not appropriate to run deficits for a long time; that’s what caused problems in the past.” IE