Vancouver Sun

Cooling economy could make room for big spending

Lower forecasts could cushion desire by Liberals to bulk up pre-election budget

- JESSE SNYDER With files from Stuart Thomson jsnyder@postmedia.com Twitter.com/jesse_snyder

OTTAWA A weakening economy could give Finance Minister Bill Morneau room to spend big in his pre-election budget later this month, even after he ignored calls to reduce the deficit while the Canadian economy was running strong.

Canada posted bleak economic numbers on Mar. 1, with GDP growing just 0.4 per cent, the lowest in over two years. Business investment, exports and consumer spending also slumped well below expectatio­ns, prompting the Bank of Canada to scale back plans to gradually raise interest rates.

That has led analysts to begin lowering their economic forecasts, and could provide the feds breathing space ahead of its March 19 budget. It would cushion any desire on the part of the government to bulk up its budget in an election year, which often leads to higher spending geared toward potential voters.

“If the focus earlier had been on slashing the deficit, I’d say given the soft patch we’re going through, both in Canada and globally, perhaps that shouldn’t be the top priority at this point,” said Doug Porter, chief economist at BMO Financial Group.

BMO recently cut its Canadian economic forecast to 1.3 per cent growth in 2019, down from an earlier estimate of 1.8 per cent.

“I do think it did put a somewhat duller glow on the economy’s outlook, and will slightly change Ottawa’s view of where the economy is headed over the next year,” Porter said.

Some observers, including Porter, had warned the feds against indulging in higher spending when the economy was at full capacity, saying Morneau should instead leave money aside to prepare for an eventual downturn.

Sean Speer, senior fellow at the Macdonald-Laurier Institute and former economic adviser to Stephen Harper, said gloomier economic forecasts could provide more cushion for the federal government to go on a spending spree later this month.

“One of the risks is that it becomes a justificat­ion for the Liberal party not to make progress on the deficit,” he said.

“They made no progress on the deficit over the mandate, of course, and just as election approaches the economy seems to be softening.”

Prime Minister Justin Trudeau was elected on a campaign promise to run a $10-billion deficit in his first year in office, then gradually bring the budget back to balance. Instead, the government routinely ran deficits around $18 billion, with no plan to eliminate

One of the risks is that it becomes a justificat­ion for the Liberal party not to make progress on the deficit.

its fiscal gap.

However, the feds will also be helped along by a much lowerthan-expected deficit last year, which came in around $10 billion, according to Avery Shenfeld, lead economist at CIBC. That could be used to expand the child benefit tax or funnelled into skills and training programs, for example.

“It gives them some additional money to play with,” he said.

CIBC revised its economic forecast for 2019 to 1.6 per cent, down from 1.8 per cent.

On Wednesday, weak economic performanc­e prompted the Bank of Canada to scale back its plans to gradually raise interest rates, leaving its overnight rate at 1.75 per cent.

In a speech Thursday, Bank of Canada deputy governor Lynn Patterson said the Canadian economy was undergoing a “detour” that could prevail for some time.

“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected,” she said.

Much of the drag on the Canadian oil economy has been a result of low oil prices, particular­ly amid a pipeline shortage that has widened the discount on Canadian crude. However, analysts were mostly caught off guard by broader economic hits to business investment levels and consumer spending, which grew at the slowest pace in four years in the fourth quarter of 2018.

Even so, Canada posted as many as 56,000 new jobs in February, according to Statistics Canada, far surpassing analyst expectatio­ns. Monthly jobs reports are widely viewed as less dependable than other hard data, analysts say, and provide only a loose view of economic health.

Analysts say jobs numbers tend to lag other economic data, and could begin to fall if business investment levels continue to sputter.

“It’s a little bit of a mystery on the jobs side to say the least,” said Brian DePratto, senior economist at TD Bank. “It’s the nail that’s sticking out compared to all of the others.”

TD Bank on Thursday will also revise down its outlook for Canadian economic growth.

 ?? TIJANA MARTIN/THE ASSOCIATED PRESS ?? Finance Minister Bill Morneau has ignored warnings by some observers against indulging in higher spending when the economy is robust. The Liberals have routinely run deficits.
TIJANA MARTIN/THE ASSOCIATED PRESS Finance Minister Bill Morneau has ignored warnings by some observers against indulging in higher spending when the economy is robust. The Liberals have routinely run deficits.

Newspapers in English

Newspapers from Canada