Economic recovery is well established in Canada but still a little uncertain in the U.S., as our neighbour to the south was hit harder by the credit crisis and recession, and its housing market remains anemic.

Nonetheless, economists with Canadian financial services institutions expect the economies of both countries to grow by about 3% this year. Many are predicting a similar pace in 2011; even the more pessimistic among them forecasts growth of 2%-2.5% next year.

As long as growth is 2% or higher next year, corporate earnings should continue to rise. The consensus is for an estimated 12% pretax profit increase in 2011 in Canada and 7% in the U.S., following 21% and 17%, respectively, this year. Economists with Montreal-based National Bank Financial Ltd., who expect growth of just 2.3% in both countries in 2011, are predicting profit gains of 9% in Canada and 4% in the U.S. that year.

Margins will rise with even 2.3% growth because the excess capacity in the system following the recession means production can increase without companies having to buy additional machinery and equipment or build new plants, says Yanick Desnoyers, NBF’s assistant chief economist.

Nevertheless, if markets are pricing in 3% growth in 2011, there could be negative surprises on the earnings front that year if growth is only 2%-2.5%. Avery Shenfeld, chief economist with CIBC World Markets Inc. of Toronto, is also expecting slower growth in 2011 — about 2.5% — in both countries.

There’s also the possibility that there isn’t as much room for profit growth, as Desnoyers suspects.

Companies have already squeezed as many costs out of the system as possible, says David Rosenberg, chief economist and strategist with Gluskin Sheff & Associates Inc. in Toronto, A pessimist about the economic outlook, Rosenberg thinks the S&P 500 index is already about 15% overvalued and the S&P/TSX composite index is about 8% overvalued.

Desnoyers’ forecast for sluggish growth for 2011 is based on his belief that U.S. President Barrack Obama will have to tackle the U.S. federal deficit aggressively in that year to prevent a plunge in the U.S. dollar. Desnoyers points out that the U.S. federal deficit is running at more than 10% of U.S. gross domestic product; he doesn’t believe financial markets will tolerate that for long. The resulting tax increases and spending cuts will slow economic growth in the U.S., which will hit the Canadian economy as well because the U.S. buys about 80% of Canadian exports.

However, Peter Drake, vice president for retirement and economic research with Fidelity Investments Canada ULC in Toronto, says the U.S. doesn’t need to move aggressively on its deficit.

He believes financial markets will be satisfied with “a credible, five-year deficit-reduction plan” and, as a result, he expects the U.S. to take small steps rather than big ones.

Aside from the U.S.’s fiscal stance in 2011, the country faces two big issues: the health of its housing market and access to credit for small businesses.

Desnoyers is one of the more optimistic economists regarding the U.S. housing market. He expects the excess inventory of unsold homes up for resale to be cleaned up by the end of this year and that the housing market should pick up in 2011, providing some offset to fiscal restraint.

Others are less sanguine. Drake says that it looks as if the U.S. housing market has reached bottom, but he’s not expecting a quick rebound: “It’s a long way from being fixed.”

The key to recovery in the U.S. housing market will be employment growth, Drake says: “We need several months of decent job growth to give a boost to consumer confidence.”

David Andrews, director of investment management and research with Toronto-based Rich-ardson GMP Ltd., agrees that lack of employment growth is keeping American consumer confidence low. He expects house prices and sales will lag the recovery in the rest of the U.S. economy for some time and warns that as government incentives to purchase houses end, the market could weaken again.

All this is in sharp contrast to Canada’s housing market, which has been very strong. The economists don’t think, however, that a serious house-price bubble has been created; they expect a cooling in prices rather than a collapse. They note Canadian lenders have stricter credit requirements than those that prevailed in the U.S. before the subprime crisis; as well, they say, there hasn’t been a lot of speculation in the Canadian market.