The outlook for the battered North American economy is becoming clearer. With economic growth on the horizon, Canada is in a much better position coming out of the recession than its neighbour to the south.

Even though Canadian and U.S. gross domestic product growth is expected to look very similar next year, this masks the much healthier state of the Canadian economy.

Consumer spending and the housing market in Canada didn’t suffer in the recession as much as they did in U.S., which was both the source and the major victim of the subprime mortgage mess and resulting global credit crisis. So, Canada is growing from a stronger base.

This is very evident in the labour market. Canadian employment growth was “astonishingly good” in August and September, says Warren Jestin, chief economist with Bank of Nova Scotia, while the U.S. continued to shed jobs, albeit at a lower rate. Economists expect those trends to continue: Canada will see increasing employment into 2010, while the U.S. could keep shedding jobs.

Unemployment in the U.S. is already higher than in Canada, at 9.8% in September vs 8.4%, respectively; historically, U.S. unemployment has almost always been lower than in Canada.

There has also been a greater shift to part-time work and to a shorter workweek in the U.S., says David Rosenberg, chief economist and strategist with Gluskin Sheff & Associates Inc. in Toronto.

He points out that if all the people working part-time who want to work full-time, and all those who want to work but aren’t actively doing so at the moment, are included in the U.S. unemployment rate, the figure is closer to 17%.

This means that it could be a long time before the U.S. jobless rate comes down.

Indeed, Rosenberg expects the official rate to rise to 12%-13% in the next year. Companies can switch part-timers back to full-timers, he explains, and extend the workweek before they need to start hiring again.

At the same time, more and more people will be coming into the labour force, increasing the number without jobs and pushing up the jobless rate.

Economists at the big Canadian banks are more optimistic. Most feel the U.S. unemployment rate will peak at around 10% late this year or early in 2010 and then decline gradually. Bank of Montreal’s economics research department thinks the U.S. rate will average 8.8% in 2011, while Toronto-Dominion Bank’s economics department and CIBC World Markets Inc. are forecasting around 9.5%. All three firms see the Canadian jobless rate being around 8% in 2011.

The U.S.’s bigger job losses and higher unemployment rate occur against the backdrop of similar growth rates in Canada and the U.S., both during the recession and coming out of it. Both countries’ real GDP grew by only 0.4% in 2008; both are expected to be down by more than 2% this year.

The Big Six Canadian banks are forecasting average growth of 2.6% in Canada vs 2.4% in the U.S. in 2010. For 2011, BMO, TD and CIBC World Markets, the only three that currently have forecasts for that year, expect average growth to be 3.5% in Canada and 3.3% in the U.S.

The difference lies in the way the recession has hit the two economies. In Canada, exports had taken the biggest hit; in the U.S., it was consumer spending and housing that fared the worst. And consumer spending and housing activity generate a lot of jobs, explains Doug Porter, managing director and deputy chief economist with BMO’s capital markets division.

Canadian export volumes are expected to be down by 20% in 2008 and 2009 combined, and residential construction was down by about 12% in these two years; meanwhile, consumer spending increased by 3% in 2008 but will probably be flat this year.

U.S. exports were up by 5.4% in 2008 and are expected to be down by 11.2% this year, while consumer spending was down 1% over the two-year period; residential construction is likely to drop by 40% in 2008 and 2009 combined, on top of an 18.5% drop in 2007.

In addition, Canada’s strong banking system has meant that credit has continued to flow here while U.S. banks remain hesitant to lend. That makes it more difficult and more costly for U.S. companies to borrow in their bid to expand their businesses, which is normally a key driver of economic growth.

@page_break@Canadian resources are also in good shape — with the exception of the forest-products sector, which continues to struggle, and natural gas, which is particularly dependent on U.S. demand. Commodities prices did shrink, but most didn’t stay at unprofitable levels for long. Commodities have good growth prospects as emerging markets — particularly Asia, led by China — return to rapid growth.

The bottom line is that Canada caught the U.S.’s cold, but its fundamentals are so strong that it is now on the mend.

In contrast, the U.S.’s cold is a long-term illness that will require time to cure. The U.S. government and American consumers are weighed down by heavy debts and must save to pay down what they owe.

For the U.S. government, that will mean raising taxes, which will further constrain consumers. Although Porter doesn’t expect this conundrum will result in economic stagnation, he does think the U.S. economy will be sluggish for the next five to 10 years while it digs itself out of its mess.

There is, however, one bright spot, says Stéphane Marion, chief economist and strategist with National Bank Financial Ltd. in Montreal: the average gross profit margin of U.S. non-financial corporations — pretax profits as a percentage of non-financial gross domestic product — is much higher, at 10% in the second quarter of this year, than the 6% in the third quarter of 2001 and the 8% at the end of 1991. These companies are in a financial position to start hiring, and Marion believes analysts will be surprised at the resulting increase in jobs.

Marion believes the economic recovery will be sufficiently established by the first quarter of 2010 that both the U.S. Federal Reserve Board and the Bank of Canada will start raising interest rates.

However, most other economists don’t expect an increase in rates until the second half of next year.

Despite the good prospects for the Canadian economy, there are long-lasting negatives for some companies and regions — specifically, those reliant on exports to the U.S. These face the double whammy of sluggish U.S. consumer spending and a high Canadian dollar.

All economists surveyed expect only moderate growth in U.S. consumer spending, because those consumers need to save and repay some of their indebtedness despite being faced with huge losses of wealth as a result of the plunge in house prices.

In theory, these lost exports to the U.S. can be replaced by sales in other parts of the world — particularly, fast-growing emerging markets — but it takes time to penetrate new markets.

Economists also expect the loonie to stay high, fuelled both by strong resources prices and the downward trend in the U.S. dollar. The greenback needs to come down to make U.S. exports more competitive abroad and make domestically produced goods more competitive against imports.

Both BMO and Scotiabank expect the C$ to remain at around parity with the US$. The other four big banks see some depreciation in the loonie, but only to about US90¢.

Among Canadian provinces, Ontario will be hurt the most by the high C$, and the region’s growth is likely to trail the national average. British Columbia, Saskatchewan and Newfoundland and Labrador should lead in growth, while Quebec and the Atlantic provinces hover near the average. Alberta is a question mark because of the environmental questions surrounding the tarsands.

The recession has also taken a toll on private-sector pension funds — particularly in Ontario, where the downturn has pushed many companies to the edge of bankruptcy. Ottawa is considering allowing companies to fund their pensions to 120% or 130% of their estimated requirements rather than just 110%, providing a greater cushion when pension assets fall in value.

Another proposal is to give companies more time to fund pension shortfalls. Such measures wouldn’t help in the short term but could provide more pension security in the long term.

Another major challenge for Canada is productivity growth, particularly in manufacturing, as the country has an abysmal record on this, says Craig Alexander, assistant chief economist with TD.

He believes Canada needs to make productivity a major national priority, but admits that it’s difficult to get voters behind the concept because people think in terms of jobs and not in terms of the gains to the standard of living that comes from being more efficient. IE