The North American economic recovery may be unsteady and lacklustre but it is happening, says National Bank of Canada.

The U.S. GDP growth of about 2.4% in 2002 should accelerate to about 3.2% in 2003. Canada is poised to lead the G-7 for the second straight year in 2003, with projected growth of 3.6%.

The sluggishness of the U.S. recovery compared to past cycles reflects the nature of last year’s recession – precipitated by slumps in earnings and investment rather than in consumer spending, says National. The key to earnings recovery is productivity growth, part of the reason hiring has been so slow in the U.S. The resulting trend line resembles the “jobless recovery” of the early 1990s. Businesses are also holding back on inventory rebuilding.

But Canada is likely to enjoy remarkable growth in 2003. Its projected expansion of 3.6% would lead the G-7 for the second year in a row, according to the forecaster consensus, and the balanced federal budget is likely to be once again unique in the G-7.

The divergence between the two largest NAFTA economies with regard to their GDP and employment paths is unprecedented, says National. The Canadian labour market, in sharp contrast to the American, has had a record year – 500,000 jobs added since the beginning of 2002. Many manufacturing industries are operating full out, riding on the competitive advantage of a very cheap currency. Canadian consumers remain
highly confident, encouraged by strong job growth and a gradual reduction of the tax burden.

National Bank remains optimistic about the real estate market in 2003. The Bank sees the current housing boom as driven by long-pent-up demand and by the relative accessibility of
homeownership resulting from continuing very low interest rates.

Though a real estate bubble is not a risk to be ignored, the reports of widespread speculation so common in the late 1980s are simply not there, at least not on a Canada-wide scale.