Canada’s standing as North America’s leading economy is in jeopardy, as the recovery in economic growth unwinds at at a more dramatic pace than it’s faltering neighbour to the south, a top Canadian economist says.

Speaking at an outlook summary in downtown Toronto Wednesday, Brian Bethune, chief economist for Canada at IHS Global Insight said the country’s third quarter growth is now expected to track below 1% and cautioned the country’s central bank from continuing with its rate hike campaign.

“What is happening in the Canadian economy is quite interesting,” he said. “When you look at relative momentum, it is declining even faster than the U.S.”

While the Canadian economy has recovered at a more robust pace than the U.S., Mr. Bethune said the perception that it has vastly outperformed its counterpart south of border in the aftermath of the financial crisis is exaggerated.

Largely, that is because of a number of special factors, that pushed growth up significantly in early 2010 to a very high 5.8%, however, a snapshot of the past three years proves the gap in performance is much more muted.

He noted that peak to trough, the decline in Canada’s GDP during the recent recession was 3.4% compared to the U.S., where growth fell 4.1%. And since the end of the recession at the end of July 2009, the Canadian economy will have grown 3.6% versus 3.3% for the U.S.

“If you take out the noise, which includes the HST, incentives to buy autos, fiscal stimulus, the Olympics; the underlying fact or truth is that the business cycle of both economies is tightly linked,” he said.

The Canadian economy decelerated significantly to 2% in the second quarter and Mr. Bethune believes growth will likely fall below 1% in the third quarter and average 2.9% in 2010 and just 2.3% in 2011.

He said consumer spending that spiked in February and March is running out of steam, as is activity in the housing market, while momentum in the labour market has also stalled.

With the outlook for commodities mixed and core inflation at a dangerously low level near 1%, the IHS economist said the Bank of Canada’s current position on the economy is far too optimistic on either side of the border.

Not only does he think the central bank’s current forecasts estimating 3.5% GDP growth in 2010 and 2.9% growth in 2011 are too aggressive, he also believes its rate policy, which has resulted in three increases since April worth 75 basis points since deserves reconsideration.

“At this point, we think it would be advisable for the Bank of Canada to take a bit of a rest from raising interest rates,” he said.