An election lesson in economic woes north of the border
In the spring of 2010, as the United States and other developed nations were just emerging from the financial crisis, the Economist characterized Canada in a way that meshed perfectly with the country’s well-advertised sense of modesty: “The least-bad rich world economy.’’
The numbers backed up that judgment. Canada was the top performer among the Group of Seven industrialized nations during the crisis years of 2008 and 2009, as measured by the trajectory of gross national product, according to International Monetary Fund data. While Canadians did not entirely escape a recession, theirs was the mildest and shortest in the group.
Fast-forward to the present and Canadians can be forgiven for feeling a sense of bittersweet nostalgia. Their economy stumbled into a downturn early in 2015, recording negative growth in both of the first two quarters, the only G-7 country to do so. While the falloff was shallow — and much of it attributable to the plunge in crude-oil prices — a long-anticipated pickup in exports in non-energy sectors has yet to materialize.
The so-far elusive recovery was a dominant issue in the national election campaign that culminated last week, helping the Liberal Party’s Justin Trudeau, son of the late former prime minister Pierre Trudeau, end the nine-year run of Prime Minister Stephen Harper — possi-
bly offering lessons for politicians in the United States.
The Liberal Party, which will form the next government, campaigned on a program of economic stimulus through infrastructure spending and middleclass tax cuts, partly offset by higher rates on upper-income groups. The Liberals are prepared to run deficits for the next three years to ignite faster growth.
That platform resonated with voters, according to a survey conducted by Nanos Research for Bloomberg News about two weeks before the election. A plurality of 39 percent said Trudeau had the best plan for the economy, according to the poll, which surveyed 1,000 adults Oct. 3 to 5 and had a margin of error of 3.1 percent.
The economic slowdown helped to undermine Harper’s attempts to characterize himself as a competent steward who could protect Canadians from the vagaries of global financial turmoil.
As the United States’ biggest trading partner, Canada accounts for almost one out of every five dollars’ worth of American goods shipped abroad. Not surprisingly, both nations deal with some of the same economic issues.
At a moment when presidential candidates such as Sen. Bernie Sanders (I-Vt.) are calling for a crackdown on big banks, Canadians can vividly recall how they avoided a U.S.-style housing crash in the previous decade because of a regulatory regime that prevented the excesses of the subprime meltdown.
On the other hand, Canada’s heavy and perhaps excessive reliance on energy exports may offer a cautionary tale as U.S officials debate whether to lift restrictions on exporting crude oil or approve the Keystone XL pipeline, which would transport Canadian tarsands crude.
Harper often called Keystone a vital step toward his goal of making his country an “energy superpower.” When Democratic presidential candidate Hillary Rodham Clinton announced her op- position to Keystone last month, she put forth an alternative vision: making the United States “the clean-energy superpower of the 21st century.”
In Canada, the experience of recent months has left policymakers wondering when the steps they have taken to spur recovery will fully take hold — and prompted questions about whether their predecessors set the country up for a fall by assuming that the boom in oil, metals and other big commodities would last indefinitely.
“There was a lot of back-patting going on right after the crisis and during the recovery,” said Douglas Porter, chief economist for the Bank of Montreal Financial Group. “There also were many voices warning not to be complacent. There is a case to be made that our relatively stellar performance may have lulled some people into a false sense of security.”
The country’s top economic officials counsel patience and say they remain sanguine. “Canada has seen this movie before,” Stephen Poloz, governor of the Bank of Canada, said in a speech last month. “We’ve managed it well in the past, and I’m confident we will continue to manage it well in the future. . . . We’ve adjusted to rising prices; we can adjust to falling ones.”
Nonetheless, Poloz has cut the central bank’s benchmark interest rate twice this year, down to 0.5 percent, its lowest level since mid-2010. That has helped drive the currency — dubbed the loonie because the one-dollar coin bears an image of a bird — down to about 77 cents on the U.S. dollar.
“Canada has a for-sale sign on its front lawn,” said David Rosenberg, chief economist and strategist for Gluskin Sheff and Associates, which manages more than $8 billion in assets. “If you’re an American, you can’t believe how cheap things are here.”
Poloz said last week that it will take “six to eight quarters” for the economy to feel the full impact of the central bank’s interest rate cuts. The bank projected that the economy returned to growth in the third quarter of this year but lowered its GDP forecasts for 2016 and 2017.
The expectation has been that a depreciating currency would boost Canadian exports and help offset the oil price plunge, which has dried up capital investment in the energy sector.
Yet total exports fell 3.6 percent in August — the last month for which data has been released — from the previous month, with aircraft and industrial machinery contributing to the decline, according to Statistics Canada, the federal government’s official keeper of economic information. On a yearly basis, exports were down 1.6 percent, with energy products by far the biggest drag.
“The non-energy sector should be fairly receptive to the signal coming from a weaker currency. It has taken a lot longer to be realized,” said David Tulk, head of global macro strategy at Toronto Dominion Securities. “That is one of the mysteries that we are still trying to juggle.”
Tulk said one possible explanation is that Canadian manufacturing capacity became so hollowed out in the previous decade, when loonie was high relative to the dollar and other currencies and exports therefore expensive, that “we don’t have the capacity to respond to foreign demand.”
There is some basis for the official optimism that the country’s detour into downturn will be short-lived. Even if the great commodities super-cycle that fueled previous growth has run its course, many of the advantages that allowed Canada to escape the financial crisis with just a glancing blow remain in place.
Its banking industry remains carefully regulated, with relatively high capital requirements and a leverage limit that requires an asset-to-capital ratio of no more than 20-1. While some worry that the robust housing market in cities such as Toronto and Vancouver may become overheated, Canada is insulated from the kind of subprime crisis that struck the United States by rules that require home buyers with mortgages exceeding 80 percent of a house’s value to take out insurance against default.
“Regulation can stifle growth, but it can also spare you a lot of heartache,” said Gluskin Sheff ’s Rosenberg.
And economists note that the first-half downturn was quite modest — a 0.2 percent decline in real GDP in the first quarter and 0.1 percent in the second, according to Statistics Canada — and that most projections call for the economy to wind up in positive territory, if just barely, for the entire year. Job creation has remained positive, even though the unemployment rate rose to 7.1 percent in September, two percentage points above the U.S. rate.
“If this goes down as a recession, it will go down with a big fat asterisk next to it,” Rosenberg said. “It was really a one-trick pony,” centered mostly in the energy sector, he added. “This was not a broadly based decline in the economy.”
How best to keep that pony corralled was a central issue in the just-concluded election.
“We have made a straightforward choice,” Trudeau said as he campaigned in the country’s largest city shortly before the vote. “We think the Canadian economy — and the people of Toronto, spethe cifically — need investments.”
That may allow the central bank to stand aside for a while and let fiscal policy do the heavy lifting, said Porter, the centralbank economist. Two days after the election, the bank held its benchmark rate steady.
If there is a broader lesson to be drawn from the Canadian experience, economists say it is an old one: Diversify. The long run-up in commodity prices — which affected minerals, lumber and agricultural products as well as energy — created unintended consequences that are being felt only now.
“There was a huge debate over whether we were suffering from Dutch disease,” said Porter, referring to the classic term for a resource-driven expansion that hurts other parts of an economy. “In hindsight, that’s exactly what happened. The sustained strength of the Canadian dollar back then just squeezed out other internationally competitive industries like manufacturing and tourism. Tourism is recovering, but it’s going to be a long grind for manufacturing.”
Canadian Liberal Party leader and incoming prime minister Justin Trudeau at a victory rally in Ottawa last week.