We’re getting a look at the true state of Canadian economy, and it’s no world beater
Now Trudeau oversees one of weakest in Group of Seven, Kevin Carmichael writes.
Thank goodness the Trudeau government abandoned its promise to balance the budget in 2019: We’d be looking at a recession if it hadn’t. Statistics Canada’s new tally of economic output should prompt gut checks all over Ottawa, from the central bank to the Prime Minister’s Office to the opposition benches. Everyone appears to have overestimated Canada’s ability to generate economic growth without the nitrous boost of zero interest rates. The world beating economy of 2017 wilted in the face of Donald Trump’s trade wars, weaker oil prices, and somewhat higher borrowing costs.
Gross domestic product slowed to an annual rate of 0.4 per cent over the final three months of 2018, compared with two per cent in the third quarter, Statistics Canada reported on Friday. Government spending, an unusually large accumulation of inventories, and household expenditures barely outweighed a big drop in investment, avoid- ing a contraction. Overall, GDP expanded 1.8 per cent last year, compared with three per cent in 2017, when Prime Minister Justin Trudeau boasted about leading the strongest economy in the Group of Seven. For now, he oversees one of the weakest. Not good. The Bank of Canada warned last month that we had slid into a soft patch. However, the central bank’s idea of a weaker fourth quarter was an annual growth rate of 1.3 per cent, the estimate from its latest outlook, published last month.
The miss suggests the economy isn’t running as hot as policy-makers thought, which could prompt them to slow, or even stop, their march to higher interest rates. We won’t have to wait long to find out, as the central bank’s next policy announcement is set for Wednesday. Lynn Patterson, a deputy governor, is scheduled to deliver an update on the central bank’s thinking at an event in Hamilton, Ont., the following day.
“The GDP report is unambig- uously weak,” said Sébastien Lavoie, a former Bank of Canada economist who now works at Laurentian Bank in Montreal. “It clearly increases the risk that the BoC might not be able to increase its policy rate during 2019.”
Some already are saying that Stephen Poloz, the Bank of Canada governor, erred in orchestrating five interest-rate increases between July, 2017 and October, 2018. (Policy-makers left the benchmark rate unchanged at meetings in December and January.) Maybe only a few hikes would have sufficed to keep a lid on inflation? Consumer spending grew at the weakest rate in a decade and output related to housing plunged at an annual rate of almost 15 per cent, the most since the financial crisis. Before you blame the central bank for the slowdown, keep in mind that the policy rate was a ridiculously low 0.5 per cent in early 2017, and the current rate is only 1.75 per cent. Poloz is no John Crow, the former Bank of Canada governor known for putting low inflation ahead of economic growth. The current head of the central bank said all along that he knew households would be sensitive to higher interest rates, if only because borrowing costs had been so low for so long. There were good arguments for raising interest rates even higher, yet Poloz resisted. He knew the economy wasn’t ready.
But central bankers have sensitivities of their own. They internalized the lessons of the financial crisis and were determined not to repeat their mistakes. Canadian households were borrowing at rates that could only end in disaster. They had to end that mania or risk a wave of personal defaults. The policy rate remains below the neutral rate, the setting at which the Bank of Canada estimates that monetary policy is neither encouraging nor discouraging borrowing. In other words, money still is on sale, so interest rates aren’t the problem. If you feel the need to blame an authority for this slump, you might take a look around the PMO or the finance minister’s office.
Ahead of last year’s budget, virtually every industry association called on the government to do something about competitiveness. The uncertain future of the North American Free Trade Agreement and the country’s inability to build pipelines was hurting business sentiment, and U.S. tax cuts had erased an advantage that Canada had enjoyed for years. The Bank of Canada acknowledged this by cutting its outlook to reflect the likelihood that business investment would be diverted to North America’s largest economy. Trudeau and Finance Minister Bill Morneau did nothing. The 2018 budget had little to say about competitiveness. They made up for it in the fall economic statement, cutting taxes on investment and promising to cut regulation. But the damage was done: Investment in machinery and equipment dropped almost five per cent in the fourth quarter, the second consecutive quarterly decline. Monetary policy needed more help from fiscal policy at the start of last year, but the government didn’t provide any. The Opposition might seek to exploit that failure, but if it does, it would have to explain how its constant nagging about budget deficits is helping matters: The latest GDP figures show that austerity would only hurt the economy now. The recovery from the Great Recession, and then the recovery from the oil shock, were fuelled by household debt. During that time, neither the Conservatives nor the Liberals did enough to nurture an economy that would be capable of powering through turbulence. Now, as the stimulants wear off, we are getting a look at the true state of Canada’s economy. It’s no world beater, that’s for sure.