Growth slows to a crawl in August
Liberals’ promised infrastructure spending could become stimulus next year
OTTAWA — The Canadian economy’s climb out of a mild downturn in the first half of 2015 is now beginning to slow.
And if growth weakens further in the coming months, the promise of billions of dollars in stimulus spending — in other words, deficits — by the incoming Liberal government might just come in handy.
August’s 0.1 per cent growth, announced by Statistics Canada on Friday, means the economy has eked out three straight monthly increases. But after two consecutive quarterly declines, the broad definition of a recession, a modest recovery in the third quarter is anything but assured — even with an anticipated leg up from the United States.
If prime minister-designate Justin Trudeau and his cabinet, who will be sworn into office on Wednesday, “carry through with the goal to raise the budget deficit to $10 billion, that could add as much as half a per cent to growth next year,” said Douglas Porter, chief economist at BMO Capital Markets.
In fact, Trudeau plans to pour an additional $10 billion into the economy over two years — and a little bit less in a third year — piling up annual deficits along the way.
“While we would quarrel — perhaps strenuously — with the spending-heavy nature of the plan, the moves would give at least a temporary lift to growth ... and run in the precise opposite direction of federal restraint of the past five years,” Porter said.
For this year, he added, “we have not adjusted our forecast — yet. But the pen is at the ready, if and when those policies are budgeted. That’s a question mark.”
One thing is more certain: We can’t continue to rely on the Bank of Canada to do the heavy lifting. After two interest rate cuts already this year, monetary policy-makers are in a wait-andsee mode — watching the pace of recovery in the U.S. and ready to adjust their forecasts when, and by how much, the Liberals deliver on their promise.
“Infrastructure projects are not going to be done immediately,” said Craig Alexander, vicepresident responsible for economic analysis at the C.D. Howe Institute.
“And, as a consequence, it’s going to take time for the money to flow. And you get the lift in the economy when they money is spent,” he said. “If the stimulus adds half a point to GDP, I think it’s going to lift it in the second half of the year ... and it will bleed into 2017.”
The modest GDP growth in August adds to gains of 0.3 per cent in July and 0.4 per cent in June.
The August reading was in line with most forecasts by privatesector economists, and should keep the Bank of Canada on the sidelines with little need at the moment for any additional monetary stimulus.
The central bank began cutting its trendsetting interest rate in January, by a quarter point, as the impact of the global collapse in oil prices began to hit the economy. Governor Stephen Poloz reduced the rate by the same amount in July, taking the lending level to 0.5 per cent.
On Friday, Statistics Canada said manufacturing — a sector that has struggled to maintain a sustained recovery since the 2008-09 recession — rose 0.4 per cent in August, after 0.6 per cent increases in both June and July. Retailers also saw a pick up in August, gaining 0.6 per cent. That followed an advance of 0.3 per cent in July.
Despite the plunge in crude prices, Canada’s energy sector overall has been generating gains in the most recent three months. In August, output rose 0.4 per cent. Mining, quarrying and oil and gas extraction advance by 0.4 per cent during the month.
Still, the outlook for Canada’s economy will depend strongly on the health of the U.S. — our biggest destination for exports. This week, the U.S. Commerce Department said GDP by an annualized pace of 1.5 per cent between July and September, after a 3.9-per-cent increase in the second quarter.
“A lot of the (U.S.) data in the recent weeks have been on the disappointing side,” said BMO’s Porter.
“But from a bigger-picture perspective, the U.S. economy is chugging along just fine. And it’s just not weak enough to justify the persistence of zero interest rates,” he said.
“Even if the economic data are a bit underwhelming in the weeks ahead, I still think they’re a very compelling case for the Fed to start raising interest rate. The economy doesn’t have to be spectacular, or excellent, it only has to be good.”