If Canada is so much better off, how come U.S. economy is pulling ahead?
OTTAWA — The world is coming out of the recession but it’s the United States, not Canada, that appears to be one of the countries leading the charge.
Canada’s economy suffered a confidence-sapping setback during the summer, when gross domestic product actually shrank 0.1 per cent in August, the first outright decline since May.
Following a flat July, August’s data could result in a negative third quarter — barring a stronger September — meaning that in a technical sense, the recession has yet to end months after it was declared over.
Even worse, the retreat was widespread, led by the critical goods production sectors including manufacturing, oil and gas extraction and mining.
Compare that with the U.S. reporting Thursday that its GDP shot forward 3.5 per cent in the third quarter. Economists say it is now impossible for Canada to come close to matching its southern neighbour when third-quarter numbers are tabulated.
Canada is also almost certain to fall well short of the Bank of Canada’s projection, made only last week, of two per cent growth for the July-September period, said Scotiabank economist Derek Holt.
That would mean the U.S. has bettered Canada the last two quarters.
That’s a surprising development. For months, the Harper government has been boasting that not only was Canada’s recession shorter and milder than in the United States and other G7 countries but also that the recovery would be snappier and more sustainable.
“Far from leading the G7 out of recession, at least four of the seven are ahead of us,” said Liberal critic John McCallum.
“ Why? I would put considerable blame on the government because they were slow to act with stimulus and they’ve been extremely slow to get the infrastructure spending out.”
Speaking in Toronto, Finance Minister Jim Flaherty noted that the U.S. surge is largely attributable to short-term stimulus spending, with the clashfor-clunkers program adding a full point to its GDP.
But he also expressed dismay that Canada’s economy was not doing better adding: “ We have to be on guard to ensure the we continue to stimulate the economy ... so we don’t slide backward.”
Expressed in GDP, the broadest measure of economic performance, the gap between the Canada and the U.S., the epicentre of the global meltdown, has been hard to discern.
Canada barely beat out the U.S. during the downturn, contracting 3.3 per cent from peak-to-trough compared with 3.7 per cent in the U.S.
But since the spring, America has left Canada in the dust. The U.S. recorded a minuscule 0.7 per cent decline in the second quarter, compared with minus 3.6 per cent in Canada. Now, it has posted a stronger third quarter.
“ Yes, we haven’t had the same house price declines and financial sector calamity as in the United Sates, but by the bottom line measure of GDP, we’ve performed at least as bad and the recovery is slower,” said Holt.
“It’s a pretty wimpy start of a recovery.”
Friday’s report sent shivers through the stock market, with the Toronto index plunging more than 300 points at one stage and the loonie tumbling more than a cent, closing at 92.43 cents US. The TSX finished that day down just over 164 points for its second consecutive weekly loss and its first monthly declined since February.
Earlier this week, the Canadian Centre for Policy Alternatives argued the United States was pulling ahead because it had done a far better job of rolling out stimulus spending. It estimated the Obama administration had outspent the Harper government seven to one.
McCallum said the Liberals estimate only 12 per cent of this year’s infrastructure stimulus has broken ground, and he fears some already budgeted stimulus might never be spent. He urged Flaherty to consider extending the “use-it-or-lose-it” period beyond 2010.
The slow growth may also cause the Bank of Canada to continue keeping interest rates at historic lows beyond the conditional commitment of July 2010 into 2011, said CIBC economist Meny Grauman.
Given choice of the two economies though, most economists would still pick Canada.
They point to the soundness of the financial sector, the smaller government debt overhang, the lower unemployment rate and better finances in Canadian households, which should prop up consumer spending. With programs like the U.S. cash-for-clunkers and attractive inducements to homebuyers ending, Canada could overtake the U.S. as early as the fourth quarter of this year, said George Vasic, a strategist with UBS Securities.
“ We haven’t had the gimmicks they’ve had that provided near-term boost,” he said. But he said the U.S. will pay for the massive spending in later years through slower growth.