In 2006, GDP growth in the two countries was about the same at around 2.8 percent. This year Canada will hit 2.5 percent, while the United States dips to a 1.9 percent pace, estimates Aron Gampel, vice president and deputy chief economist with Scotiabank in Toronto.

“Our forecasts put Canada in the range of 2.0 to 2.5 percent over the next couple of years, while the U.S. will be at 1.5 to 2.0 percent,” he says.

Canada is maintaining a faster growth rate primarily because business is booming in its resource-rich regions in the West. Mining, oil and gas exploration—and construction of the infrastructure to support those industries—is spurring demand for steel and other materials.

The United States, to the contrary, is more dependent on domestic demand. “The consumer component of the U.S. economy is softer than in recent memory because of the compounding effects of the housing crisis and the subprime financial difficulties, which are dragging consumer spending down to very lackluster levels,” Gampel says.

Conditions in Ontario and Quebec, where most Canadian manufacturers are located, more closely resemble those in the United States.

Manufacturing in Canada is facing attack on three fronts: international competition, weakening U.S. trade and the exchange rate, Gampel explains.

While Canada certainly benefits from growing demand for its commodities in emerging nations around the globe, competition from low-cost suppliers in China, India, Brazil, Russia and other developing countries is intensifying.

Because trade with America is such a big part of the Canadian economy, the slowdown in the United States is dragging down certain sectors in Canada, notably automotive and housing. “The two areas under serious compression in the U.S. are reflected here as well,” Gampel says.

Further challenging Canada’s economy is the dramatic shift in the exchange rate. In the past five years, Canada’s currency has strengthened by a whopping 40 percent, from about 62 cents per U.S. dollar to $1.03 [as of Oct. 24]. “The nonstop appreciation of the Canadian dollar has taken us from a period of undervaluation to a period of overvaluation in the most rapid adjustment this country has ever seen,” Gampel says. Such an unprecedented shift has dealt a serious blow to the profitability of Canadian companies. “In many cases, it prices them out of the market.”

Summing up, growth in Ontario—which accounts for roughly 40 percent of Canada’s GDP—is in the range of 1.5 to 2 percent, much like the United States to which it is so closely tied. “Against these headwinds, Ontario, which traditionally grows in line or above the U.S, is now growing at a very sub-par rate, despite a residential and nonresidential construction boom and tremendous service sector gains,” Gampel says.

Canadians certainly are watching closely to see how the United States navigates through this period of economic uncertainty. “Even when Canada’s currency was 20 percent below the dollar, when the U.S. economy slowed, so did Canada’s. A cheaper currency did not insulate us from a downturn in the States. It exacerbates the problem even more now that the U.S. economy is slowing and its currency is overvalued,” Gampel says.

Canada is getting a helpful boost from two factors, though: a more favorable credit environment and more robust government spending.

Interest rates are at pro-growth levels, with Canada’s prime rate actually below that of the U.S. Besides favorable borrowing costs, inflation is well contained, Gampel says.

Unlike the United States, which is burdened by a huge and growing budget deficit, Canada has been running a surplus for over a decade. “We have been paying down debt on a sustained basis and are now in a position to generate self-sustaining surpluses, which are being redeployed in support of economic growth through increases in public sector spending and tax cuts,” Gampel says. “From a fiscal standpoint, the ability of the government to continue to support growth is a very positive development, and one that differentiates Canada from the U.S.”

The housing market in the United States has suffered a 40 percent contraction, with more weakness ahead. As a major supplier of wood and other building products, Gampel notes, Canada has felt a ripple effect from America’s homebuilding slump.

Housing in Canada remains relatively strong across the country, Gampel continues, fueled by immigration and other demographic changes. Canadian homebuyers tend to be more conservative about how much they borrow and strive to pay down their debt, heading off the credit crunch and mortgage defaults that are so common in the U.S.

“Our home prices are still rising, whereas in the U.S. they are falling. We’re still building homes at a very high rate. Housing in Canada typically lags the U.S. and probably will slow, but it’s leading the U.S. at the moment,” he says.

The slowdown in the North American auto industry, with flagging demand and high inventories of cars and light trucks, has suppressed vehicle production in central Canada. Like the old-line auto companies across the river in Detroit, Canada’s carmakers are feeling the effects of lost market share to New Domestics such as Honda and Toyota, and the shift of manufacturing and assembly operations to new plants in America’s South.

“On the surface, our economy is morphing into a very service- and construction-oriented economy, and manufacturing is taking on less of a role as it shifts to lower cost production sites around the world. For many whose business it is to manufacture, there is legitimate concern,” Gampel says, though growth in other provinces, especially Alberta to the west, has helped offset the malaise in Ontario.

Canada’s employment situation outshines the United States as well, generating proportionately more jobs. “We have chronic shortages of workers in resource-rich areas of the economy in the West,” Gampel notes. “Employment growth in Alberta is over 5 percent. Ontario, at under 2 percent, is bleeding jobs in the manufacturing sector, though more than compensating for it in the construction and service sectors.”

Like in the United States, the agriculture industry in Canada is benefiting from good growing seasons, high commodity prices and escalating demand in export markets. Along with the ag boom comes increased demand for farm equipment.

The big story for metals suppliers is that Canada is undergoing a tremendous infrastructure expansion, adding roads, bridges, seaports, airports, pipelines and refineries to get its abundant natural resources to market. “The infrastructure boom, private and public, is another major factor that will keep the economy on average going further than the U.S. over the next few years,” Gampel concludes.

Service center perspective

According to the September Metals Activity Report from the Metals Service Center Institute, Rolling Meadows, Ill., demand in the United States and Canada continues to soften as service centers further reduce inventories to bring them more in line with weaker-than-expected demand.

Shipments of steel products from U.S. service centers declined 8.1 percent vs. September 2006, the 13th consecutive month of shipment declines. Likewise, Canadian steel shipments were 8.9 percent below year-earlier levels, their 14th consecutive month of declines.

Despite the weakness in the manufacturing sector on both sides of the border, business is still relatively good for Toronto-based Russel Metals, one of Canada’s largest metals distributors. Russel is somewhat insulated from the downturn in Ontario because its business is not heavily automotive related.

“We’re still making money there, but that’s the area that has been hardest hit by the currency shift and the loss of manufacturing base,” says Bud Siegel, Russel president and CEO. “We’ve always refused to sell to the auto companies because you can’t make any money. You’ve got steel mills that always want a higher price, and you’ve got car companies that want a 3 percent cost reduction every year. The guy in the middle gets squeezed.”

Russel has not escaped entirely unscathed, Siegel admits. “When automotive slows down, folks have to go find something else to do with their equipment. Therefore it spills back into areas where we have historically been the dominant player.”

The surprising strengthening of Canada’s currency has also had an indirect effect on Russel’s business. Russel doesn’t sell much directly into the United States, which would put it at an exchange rate disadvantage, but its customers do, Siegel says. “It really affects our customers whose finished goods go into the States. Some people have worked their way through it. Unfortunately, business levels have not been sustainable. We have been hit with a reduction in business because some people just haven’t been able to compete.”

The amazing performance of energy and mining in Alberta has buoyed the rest of the economy, but activity there appears to be moderating, Siegel says. “People were shipping goods from all over Canada to Alberta—goods that may have gone to the States previously. Now with Alberta slowing down a bit, you are starting to see the effects.”

In Alberta’s oil patch, rig counts are down significantly along with demand for Canadian oil and gas. “The price of energy is still good, but a lot of that goes into the States, and obviously the strength of the Canadian dollar makes it less attractive,” Siegel says. “When Canada becomes less competitive [due to the currency, etc.], people drill elsewhere.”

The Canadian government has also proposed requiring energy companies to pay significantly higher royalties for the natural resources they extract. “People are saying, ‘Why do more exploration and be taxed more by the government?’ People are holding back on drilling and exploration,” Siegel says.

Siegel’s outlook for Russel in 2008 is similar to its performance in 2007. “Our growth rate would have been dead flat except for our recent acquisition of JMS Metals Services,” he says, a $200 million steel and aluminum distributor with eight facilities in the southeastern U.S.