OTTAWA - U.S. employment numbers disappointed for the second consecutive month on Friday. This upcoming Friday, it's likely Canadians' turn to be disappointed.
After a strong start to the year, the economies in Canada and systemically important nations appear to have entered a synchronized late winter-early spring swoon that few saw coming.
Less than a month after the Bank of Canada upgraded growth prospects for both Canada and the U.S. and downgraded risks in Europe, the roof hasn't exactly caved in, but the puddles are forming on the kitchen floor.
The European recession has gone from mild to scary, with some major nations such as Spain posting depression-era 25-per-cent jobless rates. Emerging markets have slowed. The United States posted its second consecutive below consensus employment report of a mere 115,000 jobs added in April. Even in Canada, gross domestic product shockingly fell in February by 0.2 per cent.
"Clearly we have seen a deceleration of economic activity more or less around the world," said Eric Laschelles, chief economist with RBC Global Asset Management.
"The message of the last few years is don't over do it. On occasion the market and forecasters have jumped on the trend too many times. The reality is we're in a sluggish growth environment, we've been there for four years and we'll probably be there for several more."
Economists refer to the phenomenon as a "head fake" — the real world equivalent of Lucy snatching away the football from Charlie Brown's approaching foot — and it appears to have fooled the experts for the third year in a row.
Last year, a second-quarter contraction was precipitated by supply-chain disruptions from Japan's natural disaster and an oil shock caused by political uncertainty in the Middle East.
This year, analysts are blaming an unusually mild winter that pushed some activity forward, persistently high oil prices and in Canada, the drag of governments flipping the switch from fiscal stimulus to restraint.
"It seems like it's deja vu all over again where the markets and analysts overestimated the strength in the economy because of a nice start to the year," agreed Bank of Montreal deputy chief economist Doug Porter, who has stuck to his long-held view that the economy will barely eke out a two per cent advance this year.
For Canada, Porter said it's already beyond the realm of reasonable probability the Bank of Canada's 2.5 per cent annualized growth estimate for the first and second quarters can be met.
Capital Economics on Friday officially took their 2.5 target for the first three months off the table and inserted an anemic 1.5 per cent in its place.
That's an important distinction because at 2.5 per cent growth, the Bank of Canada had calculated the capacity gap in the economy would close by the first half of 2013, setting up a scenario where governor Mark Carney would feel comfortable in hiking interest rates later this year.
At 1.5 per cent growth, the output gap is actually widening, suggesting no hike until at least 2013.
As for employment prospects, economies don't create jobs at faster rates than output for very long, so many analysts predict Friday's employment report will see a big payback from March's eye-popping 82,000 reading. Capital Economics' David Madani says 10,000 is more like it.
The question is: how long does the stall last?
The current run of disappointing results, particularly in North America, may be a case of what CIBC economist Avery Shenfeld calls the mixed news that comes from a mediocre economy.
Under that assumption, the current softness will likely soon give way to a run of stronger data, the scenario most analysts envision.
Finance Minister Jim Flaherty was of this view in comments to reporters following the release of the U.S. jobs data.
'We anticipate a lumpy recovery this year. But when we get to the end of the year and look back we'll see the moderate growth that was anticipated will have occurred," he said.
"The danger is we would have another type of banking crisis (out of Europe) ... which would inevitably affect Canada because we are part of a trading world, a global economy," he added.
Barring that now familiar — and still very real risk — RBC's Laschelles says another concern is the so-called "fiscal cliff" looming at the end of the year in the U.S.
Much like last summer's debt ceiling crisis, partisan political intransigence could push the U.S. to the brink of recession if Congress does not agree to extend temporary tax cuts and push back spending reductions scheduled to start Jan. 1.
Laschelles said some estimates suggest the fiscal cliff is big enough to chop three or four percentage points from the U.S. economy. Federal Reserve chairman Ben Bernanke has warned it's so large, he doesn't have the tools to compensate.
The betting is that even the U.S. Congress is not suicidal, but the risk is not zero, Laschelles said, which is also his verdict on the odds against the recent run of bad data signalling the beginning of a serious downturn that lasts beyond a few months.
Photo: CP/Andrew Vaughan
When it comes to evaluating Canadian job growth, the employment numbers are just part of what worries Benjamin Tal, deputy chief economist at CIBC World Markets. "It's not only the quantity, but also the quality of employment that's falling in Canada," says Tal. "A lot of the jobs that are being created are low-quality, especially part-time jobs and low-paying jobs." Though -- unlike the U.S. -- Canada has regained all the jobs lost in the recession, he says that an absence of good-paying jobs is the "main reason" why wages have stagnated. Adjusted for inflation, personal after-tax income is now rising at the slowest rate since 1995. Meanwhile, the skills mismatch in many jurisdictions has left employers short on skilled labour despite still-high unemployment levels in other regions. "If you lose a job, you don't have the skill set to go an find a job elsewhere that companies want and need," says Tal. (Alamy photo)
When Caterpillar decided to stop assembling locomotives in its Electro-Motive facility in London, Ont., it was a poignant reminder of how globalization is giving deep-pocketed, transnational corporations the ultimate trump card in bargaining with workers: a cheaper alternative. According to Mike Moffatt, a labour expert at the University of Western Ontario's Ivey School of Business, because of automation and an increase in imports from lower wage jurisdictions like China and Mexico, Canadian workers are competing for fewer manufacturing jobs. "That's given firms real power to negotiate down wages," says Moffatt, who points to the <a href="http://www.reuters.com/article/2012/02/06/riotintoalcan-alma-idUSL2E8D699U20120206" target="_hplink">Rio Tinto lockout in Quebec</a> as another illustration of the might afforded to companies with global reach. Since locking out workers at its aluminum smelter in Saguenay-Lac-Saint-Jean on December 31, the Anglo-Australian mining giant has used non-union workers to operate the facility at one-third capacity. With no plans to return to the bargaining table, the company recently announced it is restarting two suspended lines, and is expecting to return to full capacity in May. As Tal maintains, "In this environment, the bargaining power of labour is diminishing."
Just as the power has shifted toward private-sector employers, Michael Lynk, a labour law expert at the University of Western Ontario, says there is a sense that governments are becoming emboldened amid the post-recession climate of austerity that has swept from Toronto's City Hall to Parliament Hill. "There's increasingly an attitude of take-it-or-or leave-it by [private sector] employers, but we may begin to see that with public sector bargaining as well, where they basically say, 'You have to meet our bargaining objectives this round, and we're going to be prepared to endure a short or lengthy lockout to prove our point," he says. Though global economic instability recently prompted federal Finance Minister Jim Flaherty to pull back on his earlier commitment to deep cost-cutting in the upcoming budget, government departments are expecting spending to be slashed by between five and 10 per cent, a goal that will be met at least in part at the expense of public service jobs and benefits. The Canadian Centre for Policy Alternatives recently estimated that the <a href="http://www.behindthenumbers.ca/2012/02/02/federal-cuts-could-push-unemployment-to-8/" target="_hplink">federal government's budget cuts could push unemployment up half a percentage point, to 8 per cent</a>. (CP photo)
From <a href="http://dalgazette.com/featured/faculty-strike-rumours-explained/" target="_hplink">Dalhousie University</a> to <a href="http://www.thestar.com/article/1120516--labour-strife-ahead-in-air-canada-pilot-talks" target="_hplink">Air Canada</a>, employers no longer able -- or willing -- to fund costly pension plans are mounting attempts to roll back retirement benefits, stoking labour unrest and a growing sense of financial insecurity among workers. As Dalhouse University labour economist Lars Osberg explains, the financial crisis took a huge bite out of the value of corporate pension portfolios and the interest rate required to generate the stream of returns to make these programs sustainable. All of which explains why experts anticipate a deepening of the trend away from inflation-protected, gold-plated defined-benefit pension plans, shifting responsibility for retirement savings from employers to workers.
The power in numbers that enabled Big Labour to negotiate better wages and benefits in the aftermath of the Second World War is a distant memory today, as the <a href="http://www.huffingtonpost.ca/2011/12/12/canada-income-inequality-decline-unions-middle-class-jobs_n_1139136.html" target="_hplink">erosion of unions continues to whittle away the strength of collective bargaining</a>. This is particularly true in the private sector, where unionization sits at 16 per cent of employees, less than a quarter of public sector unionization. "I think you will see more disputes with unions having to compromise more than in the past," says Tal. "I really don't see that they have the upper hand at this point." Given the yawning gap between private and public sector unionization, Lynk warns that pressure on public sector unions could mount as it has in the U.S. in recent months. "The argument they've been floating is, 'Why should public sector workers have jobs for life, good pensions, and decent wages? They're eating up your taxes,'" he says. "I wouldn't be surprised if we're not [starting] to see the beginnings of that kind of argument here in Canada."