An elec­tion les­son in eco­nomic woes north of the bor­der

The Washington Post Sunday - - BUSINESS - BY KEN FIRE­MAN

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.

Sub­prime se­cu­rity

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.”

Of­fi­cial op­ti­mism

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.”

NI­CHOLAS KAMM/AGENCE FRANCE-PRESSE VIA GETTY IMAGES

Cana­dian Lib­eral Party leader and in­com­ing prime min­is­ter Justin Trudeau at a vic­tory rally in Ot­tawa last week.

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