A not-so-sunny outlook for Canada's economy

Theglobeandmail.com
Jan. 6, 2016
By Jeffery Simpson

“Global growth will be disappointing and uneven in 2016.” That was the prediction last week of Christine Lagarde, managing director of the International Monetary Fund.

Alas, Ms. Lagarde quite likely underestimated how disappointing and uneven world growth will be in 2016, to say nothing of Canada’s very dispiriting economic prospects.

Ms. Lagarde, when she spoke only a few days ago, did not anticipate deepening tensions in the Middle East, with Saudi Arabia and other largely Sunni Muslim countries breaking diplomatic relations with Iran, the world’s leading Shia country. Nor did she know just how disappointing China’s growth numbers would be.

A few years ago, lots of informed people talked up growth prospects for the so-called BRIC countries - Brazil, Russia, India, China and South Africa, a country tacked on later to the BRIC group.

Brazil is a mess, politically and economically, once again giving evidence of the adage about being the country with the bright future whose future never comes.

Russia, with a 15-per-cent inflation rate, has been hit by sanctions and low oil prices. India keeps puttering along, but no better. China’s growth is slowing. South Africa’s government is making its economy worse, not better, witness to which was the rand’s plunge after the unexpected firing of the country’s highly respected finance minister.

So serious growth won’t come from the BRIC countries. We know it won’t come from Europe. Given serious tensions in the Mideast, it’s difficult to imagine stability there.

There is the United States, Canada’s largest trading partner. Economic growth there seems to be rising, which is one reason the U.S. Federal Reserve, concerned about future inflation, nudged up the prime rate.

Curiously, economic analysts in Canada interpreted the Fed’s move as good news for this country. Their reasoning suggested that it portended stronger U.S. economic growth, which should help the Canadian economy.

Maybe. But higher rates in the United States mean more downward pressure on the Canadian dollar as money flows to a higher rate of return (and more economic growth) south of the border. It is a fundamentally damning analysis of the Canadian economy that it needs a very low dollar to succeed.

It had been said, not long ago, that the low dollar would spur exports to the United States. Instead, Canada’s manufacturing sector contracted for the fifth consecutive month in December. Activity fell to a record low. If the economy gets hooked on a very low dollar, kiss goodbye to any productivity gains.

Where are the bright spots for Canada?

Surging residential prices in Vancouver and Toronto? Perhaps, but does an economy really want to count on continuing housing booms in two large cities?

The energy sector? Forget about it. Oil and natural prices are going to be rock-bottom, given surplus world supply and higher Canadian costs of production. Alberta’s economy, Canada’s locomotive for a long time, has pulled into a siding. Renewables such as wind and solar are great, except that they provide only a tiny share of the country’s energy needs.

The resource sector generally? Forget that, too. World prices for certain commodities are low, especially with falling Chinese growth. (Or markets have closed because Canada dithered, as with liquefied natural-gas markets in Asia.) Getting any major resource projects approved is difficult to impossible, what with the thickets of aboriginal claims, implacable environmentalists and uncertainty over the federal government’s plans to overhaul regulatory approvals.

Government spending? There will be more of that as the new Liberal government and some provincial governments invest in infrastructure projects. This injection might boost growth by something less than 0.5 per cent.

Eight of 10 provinces are already in deficit (only British Columbia is in surplus and Quebec’s budget is balanced). The only question in Ottawa is whether the Liberals’ first-year deficit will be closer to $20-billion than the $10-billion the party had promised during the election campaign.

The stock market is sliding, wiping out asset value in almost every sector and hurting pension plans. The Canadian population is aging slowly, with the drip-drip of higher costs for government but lower economic growth as fewer people work to support those in retirement, observations made by the Parliamentary Budget Office and the Department of Finance.

“Sunny ways” is now the pleasurable leitmotif of the new government in Ottawa and, the Liberals hope, by extension of Canada. However, the country’s economic prospects for 2016 and perhaps beyond are not so sunny.