Bank of Canada Governor Stephen Poloz didn't actually use the "R" word: recession. But his monetary policy report last Wednesday said it all the same, using numbers instead of words. By projecting that Canada's economy shrank 0.5 per cent in the second quarter of 2015 (following a similar decline in the first quarter), the Bank joins a growing list of others who have concluded that Canada's economy is now in recession (traditionally defined as two consecutive quarters of negative growth).
How far has Canada's economic star fallen? Only recently Prime Minister Stephen Harper boasted that Canada's economy was "the envy of the entire world." That claim was always overstated. Now it is downright ludicrous.
The Bank of Canada cut interest rates for the second time this year, but few expect this to pull us out of the tailspin. After all, Canadians are already tapped out: household debt now exceeds 165 per cent of disposable income. And businesses are more reluctant to invest than ever -- despite expensive corporate tax cuts that drain $15 billion per year from the federal treasury. Without a strong willingness to borrow on the part of consumers or businesses, cutting interest rates is like pushing on a string.
So we must look to government for a more effective response to the recession. Unfortunately, however, that looks like another policy dead-end. Because so far the response of federal Conservatives has been as ineffectual as it is predictable: deny, point fingers, and spread fear.
Their first instinct is to deny that there's even a problem. Only ten days ago, Finance Minister Joe Oliver explicitly denied (on CBC Radio) that a recession was in the cards, and in fact continued to predict "solid growth" for Canada in 2015. In the wake of multiple weak reports on business investment, exports, retail sales, and other indicators, analysts wondered what economic planet the Finance Minister was inhabiting. Canada's economic performance has consistently lagged behind optimistic forecasts for years; now it has shifted right into reverse.
Second, when the accumulating evidence becomes too compelling to deny, the Conservatives point the finger elsewhere. Prime Minister Harper did that recently in Toronto, finally acknowledging Canada is facing a downturn, but saying "the reason for that downturn has been the downturn in the global economy." Yet the global economy is still growing (by 3.1 per cent this year, according to the Bank of Canada's most recent forecast). It's Canada's economy that is shrinking. It's hard to blame the world, when we are leading the way into negative territory.
To be sure, headlines about Greek debt restructuring and Chinese stock market volatility are worrisome. But they have not affected Canada's GDP in any measurable way. And while world oil prices are certainly a key factor in Canada's downturn, we made deliberate policy choices right here at home about how to organize our economy around world commodity markets. Government chose to forsake a more diversified, managed strategy to support innovation, investment, and exports across a broad range of value-adding industries. Instead it decided to just keep riding the oil price roller-coaster for as long as it could.
In short, this new recession, following several years of sub-par performance, is mostly self-inflicted. The government cannot evade responsibility for its decisions and actions.
Finally, the last element of the Conservatives' political response to recession is perhaps the most objectionable. They now aim to stoke fear that if any changes are made to their policy of spending austerity and misguided tax cuts, Canada's economy will be thrown into chaos. Harper, Oliver, and other Conservative ministers are now trying to capitalize politically on a recession which they themselves did so much to foster. Instead of accepting responsibility for the mess, and pledging to do better, they lash out at critics, threatening disaster if we change course.
Their claim that the coming flurry of baby bonus cheques -- a manipulative $2 billion attempt to buy votes in the coming election -- will somehow turn the economic tide, is especially insulting to our national intelligence. This pre-election giveaway is macroeconomically insignificant. Consumers are likely to save the money, anyway: they can see it's a one-time political payout, not something that really alters their budgeting. And since the end-goal of Conservative social engineering (including the baby bonus, income splitting, and other measures) is clearly to encourage stay-at-home parenting, it will in fact ultimately undermine women's labour force participation, employment, and income. It's the opposite of what the economy actually needs: support for real work, more participation, and real wages.
For years Conservatives have touted their reputation as "good economic managers" to pave their way to power. This reputation is now in tatters, and rightly so. They have squandered so much opportunity, and steered Canada into a preventable, self-inflicted recession. This country needs a dramatic change of direction.
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The carbon bubble is the idea that if the world’s governments meet targets to limit climate change to 2 degrees Celsius by cutting carbon emissions, there will be a glut of fossil fuels on the market that cannot be burned. The concern is that when investors realize oil companies will have to leave much of the product they own in the ground, oil company stocks will collapse, leading to a crisis in the industry that could affect Canada. Among the people concerned about a carbon bubble is former Bank of Canada governor and current Bank of England governor Mark Carney.
Many in Canada’s oil sector have been holding their breath to see whether the U.S. approves the Keystone pipeline,which would see tarry bitumen from Alberta’s oilsands pumped south for export from the U.S. President Barack Obama did not have very nice things to say about Keystone in his year-end press conference, leading some to believe he’s bent on rejecting it. The lack of a functional pipeline capable of getting the oilsands crude to international markets has held back the price of crude produced there. There’s also massive domestic opposition to homegrown alternatives such as the Energy East Pipeline or Northern Gateway.
This promises to be a big year for elections around the world, with votes at home and abroad. The Conservatives presided over a Canadian recession that was relatively mild compared to much of the world, but after nearly a decade of Conservative rule, voters could be ready for a change. The U.K. is looking ahead to an election in May. If the U.K.'s Conservative Party wins and follows through with its promise to hold a referendum on EU membership, it would be a further blow to the Eurozone. The U.S. is looking ahead to an election in 2016, and the year before an election in that country has proven to be an often interesting, volatile ride.
Weak demand and a glut of supply are keeping prices of commodities low, and it doesn’t just affect Canada’s oil patch. The mining sector, one of the heaviest hitters on the Toronto Stock Exchange, could see a resulting slowdown in investment in projects and hiring.
Canada, along with the U.S., is on track for an interest rate hike in 2015. It would be the first since 2010 and consumers — particularly on this side of the border — have continued to pile on debt loads and take out large mortgages in the years of low interest rates. While any hike is expected to be gradual, it could be a shock to some households who are struggling to pay back debt. A higher interest rate could sink more Canadians into bankruptcy and could cause a slowdown in the housing sector, which has propped up Canada’s economy in the years since the recession.
Economists have been warning consumers for years that debt loads are growing to astronomical levels, and that could be a huge risk if interest rates rise. In Canada, the household debt-to-income ratio rose to a new record high of 162.6 per cent in the most recent quarter. And things are not much better south of the border, where consumer debt is worth a total of $3.2 trillion and where there has been a resurgence in subprime lending, the risky banking practice that helped spark the global economic crisis in 2008.
An increase in terrorism and geopolitical instability doesn’t inspire confidence in investors. Threats from ISIS and other terrorist organizations have dominated headlines in the past year and such political uncertainty could spill over into broader conflicts or destabilize markets.
Russia’s ruble has sunk by about 40 per cent in the past few weeks, and the country could soon find itself in recession, partly due to Western sanctions over its aggressive behaviour in Ukraine. As a G8 country, it is a large source of demand for Canadian exports. The country already slapped retaliatory sanctions on Canada in 2014 and the lack of trade could hit Canada’s overall trade figures.
Chinese growth has been a massive driver of the global economy but is losing momentum, affecting the entire global supply chain. Investors are hoping that China’s GDP growth does not come in worse than the 7-per-cent rate it has predicted. A chain reaction caused by the slowdown in China could be particularly concerning for Canada, which had been protected from the worst of the Great Recession, benefitting from Chinese manufacturing’s demand for commodities. In addition, the unrest in Hong Kong, one of the world’s financial hubs, is not over, posing a risk of more uncertainty in the region.
That’s right, Greece is still causing Europe, and global markets, some serious headaches five years after its sovereign debt crisis was first brought to light. It is again making headlines as the new year approaches, with legislators rejecting Prime Minister Antonis Samaras’s nomination for president, Stavros Dimas, triggering a snap election. Polls favour anti-austerity candidates, which could see the country pull away from its debt obligations under its bailout plan with the Eurozone, stoking concerns for the rest of the continent, which is already struggling with sky high unemployment and a shaky financial system. A slowdown in Europe would have knock-on consequences for Canada.
After five years of relatively stable crude prices, oil prices have dropped nearly 50 per cent since June to their lowest level in five years. The drop is a double-edged sword for the Canadian economy. The IMF says it could boost global economic growth by as much as 0.8 percentage points above the expected 3.8 per cent. It’s also good news for consumers, whose savings at the gas pump could translate into more spending elsewhere. However, if oil continues to hover between $60 to $70 a barrel, it could expose weaknesses in oil-dependent countries and companies and even push some to default on debt obligations. The tanking price is bad for Canada’s oilsands, a major source of domestic economic growth and could push the loonie lower.
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