Budget vulnerable to risk of recession
Writing a federal budget is one thing, selling it can be quite a different matter. In fact, almost from the time the document landed in the hands of analysts, some were already unwilling to buy into it — most critically, they question the long-term forecasts for the economy.
Over the next five years, the Liberal government is calculating a gradual easing in the fiscal debt outlook, paving the way for a gradual return to a balanced budget — or even an increasing surplus.
But if economic history tells us anything, it’s that another recession could be lurking around the corner.
“Usually, the U.S. economy goes into a downturn about a year or two years after the Fed begins tightening aggressively,” said Douglas Porter, chief economist at BMO Capital Markets.
So, while Finance Minister Bill Morneau is promoting his just-released 2016 budget as a blueprint for growing Canada’s economy, others are warning that the next few years will still be challenging.
Economists at JPMorgan Chase & Co. in New York are warning there is a 50-percent chance of a U.S. recession in the next two years — a concern that could be supported on Friday when the U.S. releases its latest gross domestic product data.
“With wages picking up but productivity growing in slow motion, margins are likely to continue their declines, which have historically signalled an expansion near its end,” JPMorgan economist Jesse Edgerton said in a research note.
Given Canada’s reliance on the U.S., that could point to trouble in this country.
On Tuesday, the Liberals set a course from now until fiscal 2020 for a new string of deficits, beginning with a $5.4-billion hole in fiscal 2015-16 that will be widened to more than $29 billion in the fiscal year beginning April 1, 2016, before being trimmed back to around $14 billion in 2020-21.
Now, the threat of another downturn is raising its head.
“It might not happen this year, it might not even happen next year,” Porter said.
“It’s unheard of for the U.S. economy to go a decade without a recession. It might be at the very end of this time frame, but I think ... it’s very likely that over this five-year period we’re going to go through a downturn in the U.S. economy — which will affect Canada.”