Q1. Is Canada in recession because of China? Q2. Will their newly-published ‘Federal Balanced Budget Act’ help?
Yesterday, as market volatility continued, GDP figures were issued showing Canada now in ‘technical’ recession. It was a close call, with quarterly growth in 2015 Q2 at -0.1 per cent, following a fall of -0.2 in Q1. But few seem in doubt that conditions in this G8 economy are a worry. The chart shows the deterioration into Q1 was abrupt, coming on the back of a relatively long-run of positive figures since the crisis. In September 2014 the Conservative Prime Minister Stephen Harper had described the Canadian economy as “the envy of the world”.
“We have emerged from the worst global economic downturn since the Great Depression with an economy that is, make no mistake, the envy of the world,”
The Canadian government has also just published balanced budget legislation. At the general election on 19 October we will see how austerity politics – now rebranded as fiscal responsibility politics – plays out in the face of recession.
Canada GDP, quarterly growth
Oil, China (and debt)
The one word you don’t read or hear in discussions of the downturn is ‘China’. The most prominent explanation is the fall in international commodity prices, most obviously oil.
For the OECD (and many others) “much of the recent price decline” for oil was originally regarded as “attributable to supply factors”, though “demand factors also played a role”. Recognising different impacts by country, as a ‘non-OECD net-oil importing economy’, China was likely to be one of the “greatest beneficiaries” (also as a country that “makes greater use of coal, whose prices also tumbled”) (OECD Economic Review, June 2015, pp. 24-5). So China was not seen as behind the fall in commodity prices; really, quite the reverse.
Oil price declines have undoubtedly hit Canada hard. From an industry perspective, still positive services growth (+0.6% in Q2) is more than offset by declining oil and gas extraction (-4.5%), construction (-1.3%) and manufacturing output (-1.0%). From the demand perspective, the decline is dominated by falling investment and weak net trade.
Household demand is still holding up, though there are risks here too. In a recent report, Canada was shown to have the fourth highest household debt to income ratio of the major OECD economies (behind only Netherlands, Australia, Ireland and just ahead of the UK, who are fifth). In the Economic Outlook cited above, the OECD warned “High household debt and house prices pose financial-stability risks”.
Debt apart, the relatively prolonged positive performance of the economy has meant that Canada is one of a number of economies that have been operating outside deflationary territory. The headline inflation figure in August was 1.3%, with core inflation (excluding oil etc) a little higher at 2.2%.
Like most advanced economies, Canada operates an inflation target (2% inflation ‘control target’ and a ‘target range’ of 1-3%). The Bank of Canada raised interest rates from the crisis rock-bottom 0.25% to 1% over June to September 2010 where they stood until the end of 2014. However the deterioration in the economy meant a cut of 25 basis points in January and a further 25 in June, so that rates are now at 0.5%.
In the meantime, in the political arena, balanced budget legislation is in play. The OECD report for Canada a small deficit (‘general government financial balance’) of -1.6% of GDP for both 2014 and 2015. (Note though to some extent government coffers must have been a beneficiary of high commodity prices ahead of the recent fall.) The plans for legislation were announced in April, with finance minister Joe Oliver pledging to “balance the budget this year, even as falling oil prices curb revenue”. The rhetoric is all too familiar:
“We will never be able to keep taxes low and provide direct benefits to hardworking Canadians and their families, even in the face of an unexpected downturn without balanced budgets in good economic times,” Oliver said today, according to a prepared text of his speech. “That is why we need a law.”
The legislation is dated 4 August, two days after the government announced a general election to be held on 19 October. Link here, and here’s the cover:
Under these rules, when a government strays from the path of balanced budget righteousness, they have to appear before a parliamentary committee with plans for its resolution; public sector workers get a pay freeze (pretty much), and ministers and the prime minister get a 5% reduction in pay. The legislation provides room for manoeuvre in the event of recession, or “extraordinary situation”. This room for manoeuvre does not seem to include public sector wages.
In an editorial on the situation today, the Financial Times observes that Tom Mulcair, the leader of the opposition New Democratic Party, promising to raise corporate taxes and balance the budget “makes little sense when a slowing Canada needs stimulus. Fiscal retrenchment would also undercut the Bank of Canada’s recent monetary easing.” The editorial doesn’t mention the balanced budget legislation. Earlier in the paper the FT also notes that “Justin Trudeau, the leader of Canada’s Liberal party has pledged to use deficit spending to almost double federal infrastructure funds to nearly C$125m ($93) over ten years, talking advantage of low interest rates and promising to rebalance the books by 2019”. Unfortunately in the editorial Mr Trudeau (son of a famous Canadian Prime Minister) “in spite of his Hollywood good looks and pedigree … has failed to set out a coherent plan to revive growth. He is also seen as an intellectual lightweight”.
Austerity politics has become fiscal responsibility politics, no less nonsensical and no less ugly. In the wake of market turmoil and increasingly widespread economic dislocation, this is hardly ideal.