Perspective will matter during grim years ahead
Happy New Year. Things are still bad. They won’t get better for some time.
This is the message on the economy from Bank of Canada Governor Stephen Poloz. It’s not a cheery one. It does have the virtue of being realistic.
For Prime Minister Justin Trudeau, this is sobering news. His sunny, Liberal government came to power knowing that it would have to deal with a weak economy.
But it’s not clear that Trudeau understood how weak the economy is or how long it might take for jobs, incomes and wages to fully recover.
First, there is the question of China, which Poloz did not dwell on in his Ottawa speech Thursday.
China is the unknowable anomaly — a capitalistic economy (the world’s second largest) but one that is directed by a Communist government.
We know from China’s experience that capitalism doesn’t need democracy to flourish. The Chinese economy does quite well without fripperies such as free elections. What we don’t know — and what last week’s stock market turmoil has underlined — is whether China’s dictators will be able to control the free-market forces they have deliberately unleashed.
Experts are divided on this. Billionaire investor George Soros warns that China’s problems have put the world on the verge of another recession. Economist and Nobel laureate Paul Krugman, while wary, is not as pessimistic.
In his remarks Thursday, Poloz was sanguine about China. He argued that the fall in oil and commodity prices, by making production cheaper in industrial nations such as China, has strengthened the global economy as a whole.
But the central bank chief spent most of his speech on Canada. In effect, he said don’t get your hopes up.
Falling oil and commodity prices have made the overall Canadian economy unambiguously worse, he said.
That’s not just because of job losses in the oil-producing provinces. It is also the result of the falling loonie.
The decline in the Canadian dollar associated with falling oil prices makes imports more expensive. And that in turn, he said, is costing every Canadian man, woman and child about $1,500 a year.
Poloz noted that the central bank could alleviate this by hiking interest rates so as to attract money into short-term Canadian dollar assets (thus pushing the loonie up). But that would choke off jobs and investment, he said, ultimately making matters worse.
The best solution, he said, is to keep interest rates and the dollar low to spur manufacturing and other non-energy exports.
This, he acknowledged, “can take years to play out.”
He also said, as he has before, that federal and provincial governments could encourage economic recovery by spending more or taxing less.
To its credit, the new federal government gets this, at least in part.
Trudeau campaigned on the need to have Ottawa spend more than it takes in. He and Finance Minister Bill Morneau have signalled that these deficits may have to be higher than initially anticipated if the economy is to be bolstered.
But the government is still committed to balancing the books by 2019, which may be overly optimistic.
Currently, any grumbling over the Liberal deficit plan is muted. The opposition parties recognize that Trudeau fought and won an election with deficits as a key part of his platform. The general public seems happy to have more spent on roads and public transit, even if this does push up the national debt.
But deficit hawks are strongly entrenched in all parties, including the Liberal party. Expect to see pushback if Morneau’s short-term deficit forecasts exceed the $25.1 billion over three years promised during the campaign.
Expect the Liberals themselves to be spooked if it seems they won’t be able to balance the books before the next election.
All of which is to say that some crazy things could happen if, as Poloz and others predict, the Canadian economy continues to sputter along.
Kathleen Wynne’s Ontario Liberals were elected on a Trudeau-like promise to build infrastructure. But the spectre of debt and deficit so unhinged Wynne that she is now selling off Hydro One, the province’s valuable electricity-transmission monopoly, in order to meet her arbitrary target for balancing the budget.
We can only hope that Trudeau is able to keep matters in better perspective during the grim years ahead. Thomas Walkom’s column appears Wednesday, Thursday and Sunday.