Compared to going into the 2009 global recession, the Canadian economy is in much worse shape
Despite high consumer debt and housing prices, Canada went into the 2009 global downturn with several advantages that allowed it to economically outperform the other G-7 countries over the ensuing period. However, the erosion of some of these advantages means the current slowdown will be more difficult.
First, Canada went into the financial crisis with the good fortune of a banking system that was strengthened in the wake of a series of failures in the 1980s.
Second, the federal government eliminated its deficit in the 1990s and had driven its net debt position down, giving it fiscal room to manoeuver.
Third, Canada was lucky that resource-producing western provinces could take up the slack when the manufacturing heartland slowed as the U.S. export market withered.
The icing on the cake, however, was the expert and reassuring policy presence provided by then Federal Finance Minister Jim Flaherty along with Bank of Canada Governor Mark Carney.
As Canada’s economy slows in 2015, its consumer debt remains high as a share of GDP and its house prices are still considered overvalued by organizations such as The Economist and the IMF. While households are getting some breathing room from the cash being freed up by the drop in gasoline prices, the continued presence of these old issues is accompanied by additional negative factors.
Deficits have accumulated at both the federal and provincial level and eroded the improvements in the public debt position that occurred prior to the 2009 recession. Ontario and Quebec as well as the federal government could head into recession with the highest net debt levels in recent memory. Then there is the fall in oil prices, which means that the investment spending and employment boom led by Alberta and Saskatchewan is taking a pause.
Next, compare Flaherty and Carney with the current duo in place – Finance Minister Joe Oliver and Governor Stephen Poloz. Both have taken actions that have surprised and perhaps unsettled the public and the business community. The postponement of the Federal budget to April has generated uncertainty about both the federal finances and the future course of the economy.
Meanwhile, the Bank rate “surprise” – a fall in the bank rate – has led to speculation that perhaps the Canadian economy is doing even worse than feared. Central bankers do best when they avoid sudden emergency manoeuvers. The perceived abruptness of the recent fall in the bank rate may have been an additional factor in the plummeting value of our currency.
Of course, the depreciating dollar and a more robust American economy are factors that may stimulate our export industries. However, the anticipation that the falling dollar will turn around the Canadian manufacturing sector may be overly optimistic, even with the U.S. upturn underway.
The central Canadian manufacturing sector has shed plants and infrastructure and hundreds of thousands of jobs, particularly in Ontario. Think of the GM plant closure in Windsor, Heinz in Leamington, Kellogg’s in London, Sterling Truck in St. Thomas or the many northern Ontario pulp mills that have closed. There will be a substantial lag in getting new production started up again, given that many plants have shut their doors for good.
Moreover, the great benefit to central Canadian manufacturing and employment from servicing the western resource sector has been underestimated. The slowdown in the oil and gas industry will have an impact on thousands of workers who currently commute west from central and Atlantic Canada.
As for a drop in interest rates stimulating the economy, one wonders how much more effective low interest rates can be given that they have been at historically low levels for years now. Low interest rates may undermine the economy’s long run health if they merely encourage governments and households to take on even more debt. Since 2010, the household debt to GDP ratio for the hard hit U.S. has dropped to 80 per cent while more prosperous Canada’s has remained above 90 per cent.
We have not used the last few years of prosperity to put our economic house in order, preferring instead to coast on debt and the bounty of a resource boom. When comparing our current slowdown with the last recession, the indications are that we may be in for a much bumpier ride.
By Livio Di Matteo
Livio Di Matteo is Professor of Economics at Lakehead University.