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Finance
 
INTERNATIONAL : CANADA: ECONOMIC SLOWDOWN
“It’s all Good in Canada.” Really?!
During The Recent Election Campaign The Newly elected Prime Minister of Canada Stephen Harper touted Conservatives as The Best Economic Managers The Country has ever had. But can his so-called ‘Best Brigade’ Assure Canada of a growth that’s really sustainable in The Long run?
Issue Date - 26/05/2011
 
On May 30, 2011, when the 308-seat House of Commons of Canada next rises, it will be dominated by 167 Conservatives. Well, this certainly means a lot to Stephen Harper, who, despite winning two previous elections (Harper was first sworn in as Canada’s Prime Minister in 2006), has never before held a majority government. But then, does this really mean anything to the Canadian economy which, perhaps, is standing on the verge of a slowdown?

Interestingly, all this while, Harper has been repeatedly telling Canadians that the Conservatives are the “Best Economic Managers” that the country has ever had, and it’s because of them that Canada bounced back strongly from the global financial crisis. “But are they, really?” is the question that several have been asking on the streets of Ottawa & Toronto since March 25, 2011 when Canadian opposition parties had brought down Harper’s government by supporting a motion of no confidence that held Harper in contempt of Parliament for refusing to share financial details of decisions taken by him with the House.

No doubt, to some extent Harper seems right, as of the seven industrialised nations that comprise the G7, Canada clearly stands out when it comes to economic recovery from the recent recession. It not only expanded at an annual pace of 5.8%, but also recovered both the employment and real output losses that accrued over the troubled course, in just one year. But then, though Harper now has the clear mandate to deliver on his promises and the freedom to do so without much intervention from the opposition, there are many who still doubt his claims. And, there are good reasons for Canadians to be sceptical of Harper’s claims and even more reasons to be worried about what his promises (currently, the Harper administration projects a deficit of $29.5 billion for this fiscal year and a return to surpluses by 2014-2015) and policies would mean for Canada’s economic future.

After growing at a red hot annualised rate of 5.8% in Q1 2010, Canadian economic growth had come down to just 1.8% in Q3, 2010. Though the GDP growth has unexpectedly risen to 3.33% in Q4 2010, the celebration isn’t going to last long as domestic demand, which so far fuelled this growth, is all set to decrease in the near future. While a still healthy job market (employment growing at 2% y-o-y in Q1 2011) should continue to fuel domestic demand, there are several potential headwinds that need to be avoided. Further, with the benefits of the inventory swing (inventory rebuilding had accounted for over 33% of GDP growth in 2009) behind and the boost from government stimulus (over $60 billion in 2009 and 2010) fading, how is that Harper’s so called “Best Economic Managers” going to sustain Canada’s economic boom in the long run? In fact, they have yet to explain how they will find $1.6 billion in cuts already booked in the 2011 budget.

 
Although Bank of Canada (BoC) had not replied back to B&E’s queries till the time the magazine went to print, Mark Hopkins, the Sr. Economist at Moody’s Analytics agrees to the fact as he tells B&E from West Chester (US), “Though stronger exports will boost net trade in 2011, domestic demand in Canada will slow considerably. On net, GDP will grow 2.7% for the year. This forecast carries considerable downside risk, however. Compared to the US, Canadian exports and homes both seem expensive, which could further threaten the outlook for the trade balance and residential construction.”

Apparently, the biggest issue that the new government faces is how quickly it can balance the budget. Presently, the target is FY2014-15, but then how far can Harper reach without cutting the public spending is still unclear. After all, there is no logic in spending billions to revive the economy from recession and push it back into the doldrums with arbitrary spending cuts. And that to at a time “when the country is experiencing a “twin deficits” problem: Capital is being drawn in by public sector deficit spending, boosting the Canadian dollar, which in turn makes imports cheaper while hobbling Canadian exporters in global markets,” adds Hopkins.

Housing starts too have fallen to 1,77,600 units, down nearly 10% from the peak reached in April 2010. Interestingly, in 2009, several people had rushed into the market so that they could take advantage of near zero short-term interest rates and, as a result, in the 11 months between January and December 2009, existing home sales skyrocketed by almost 66% and prices by more than 21%. But, since the start of 2010, one can clearly see that phenomenon reversing. While sales have corrected by more than 20%, prices too have softened by 3.5% (as of February 2011) and the trend is expected to continue in the future as critics believe that Canadian assets still remain inflated.

Even Canada’s international trade surplus shrank further in February, falling to $34 million from $395 million in January, marking the second consecutive monthly decline. Even Net exports have not been a positive contributor to GDP growth since Q1 2009. While it does not appear that the drag from net exports will slow down anytime soon, what’s more confusing is the continuously rising inflation (from 2.2% in February 2011 to 3.3% in March 2011, the biggest monthly change since 1991; in fact, inflation was at 1% in June 2010) amid improving productivity growth (5.0% y-o-y as of March 2011), dampening wage gains (from 4.55% in January 2011 to 3.97% in February 2011), and a closing output gap. So, with fragile economic recovery underway and inflation rate all set to break the ceiling set by BoC (though core inflation, at 1.7%, is still on the low side, below BoC’s 2% target, driven by global commodity prices it is expected to only move north from here), is it appropriate on the part of Harper’s so-called best economic managers to just rely on the ‘short cuts’, be it while handling interest rates or increasing output, which they have been actually doing so far?

Not at all, even an average economist would say! Rather, they now need to work towards developing models that have a better understanding of money and credit flows at a more disaggregated level, and that include the key institutional features of banking and capital markets. If Harper’s economic managers look only at interest rates, inflation, and output, they might miss out on the bubbles that perhaps might be in the making. And if that happens, you certainly know who is going to lose (if not win!) on October 19, 2015, when Canada next goes to the polls, if not earlier.

Manish K. Pandey           

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