Economy & Trade, Financial Crisis, Headlines, North America

ECONOMY: Entwined with U.S., Canada Tries to Minimise Exposure

Paul Weinberg

TORONTO, Mar 27 2009 (IPS) - Canadian Prime Minister Stephen Harper has no choice but to project optimism about his nation’s ability to pull out of the economic recession by next year, although various economists and a former central bank chairman have all offered grimmer forecasts that the downturn will persist for a longer period.

That is because there are financial costs for countries when leaders are candid about the economy, says Marc Lee, the Vancouver-based economist for the Canadian Centre for Policy Alternatives.

“If they paint too gloomy a picture, then the risk is that they undermine consumer and business confidence ever the more and make the situation worse,” Lee told IPS.

At the same yet, there will be an economic price for not investing in infrastructure projects past 2010, Lee continued.

“It is going to take a few years for the economy to get back any steam. We will probably have a situation of jobless growth for a few years where the economy does indeed grow but not at a pace that actually lowers unemployment rate,” he said.

Canadian members of Parliament from the ruling Conservatives in a recent finance committee hearing were unhappy, reported the Globe and Mail national newspaper, when Kevin Page, the independent parliamentary budget officer, projected among other things a 385,000 job loss for Canada by July and a 15.3 percent “plunge” in the country’s gross national income in the last quarter of 2008.

“I am not sure if an economist needs to use that harsh a language – but that’s your decision,” said Ted Menzies, parliamentary secretary to Canadian Finance Minister Jim Flaherty.

The same newspaper also reported that the Conservatives have so far provided less than two-thirds of the promised 2.27-million-dollar to fund Page’s office – set up by the same Harper government to ensure “truth in budgeting” and economic forecasting.

Meanwhile, the Conservatives continue to be dogged by the former chair of the Bank of Canada, David Dodge. He told a recent Toronto economic conference that the economic rebound “is likely to be considerably slower than in previous times, and it’s going to be well into 2011, 2012 and 2013 before we see the level of output and the rates of growth return to something approaching capacity.”

A group of forecasters at IHS Global Insight recently projected that the world economy will contract by more than two percent this year, the U.S. economy 3.7 percent and the Canadian economy by 2.5 percent.

“This is the deepest and longest world recession in the postwar era,” said Nigel Gault, the firm’s chief economist in the U.S. “The global depth and reach of this downturn make it much more difficult for any individual country to pull out because there’s such a drag coming from the rest of the world.”

Canada’s high degree of economic dependence on the giant U.S. economy next door makes this northerly neighbour highly vulnerable to what comes out of Washington in terms of the stimulus package that is finally passed by the U.S. Congress.

Andrew Jackson, an economist with the Canadian Labour Congress, warns that even if U.S. President Barack Obama succeeds in his current ambitious multi-trillion-dollar strategy to kickstart the U.S. economy, Canada might not find a sufficient number of customers south of the border for its manufactured and resources products.

“I think there is a very facile notion out there as well that somehow the U.S. will bottom out and that most importantly the world will return to normal, as the world as it was,” he told IPS. “I find it very difficult to believe that we are going to go to be seeing a U.S. economy and a global economy driven by a big increase in consumer spending.”

Jackson foresees a U.S. export-driven recovery propelled by domestic public investments and a lower U.S. dollar. “What it means for us [in Canada] could be problematic,” he said.

Even though domestic product outsourcing for state and local government is legal under the North American Free Trade Agreement, there was “this very knee-jerk response” in some Canadian government circles towards the ‘buy America’ provisions in the U.S. stimulus package, Jackson said.

He notes that the Montreal-based Bombardier has been building buses in the U.S. market without running into any opposition or barriers.

Jackson and his colleagues in the Canadian labour movement have so far been unsuccessful in their campaign for a ‘buy Canada’ provision in Ottawa’s infrastructure spending.

Political scientist Reg Whittaker told IPS that Harper risks being blamed by Canadian voters in the next federal election if the Canadian economy tanks and so he must maintain his optimism as he ties his fate to Obama making the correct economic decisions.

The irony, states Whittaker, a professor emeritus at the University of Victoria, is that Harper is introducing a set of liberal policies, such as raising the deficit to ramp up public spending to stimulate the economy, run counter to his conservative political philosophy of allowing the free market to correct itself.

“I guess that is a problem in terms of selling himself to the Canadian public because there is going to be a degree of distrust out there. That people don’t really think that this represents a proper kind of conversion to a more appropriate way of looking at the set of problems,” Whittaker said.

One source of credible optimism comes from the fact that the well-regulated Canadian banks were not susceptible to the speculative frenzy which culminated in bankruptcies in the financial sector elsewhere in the world.

“Canada starts from a better position than other countries, which actually now look to Canada for some degree to see models of how they might do things [differently],” adds Whittaker.

But Marc Lee counters that the Canadian and U.S. governments are so focused on ensuring the stability of their respective banking systems that they are missing out on the primary cause of the current recession which is the growth in household debt, rising unemployment and a drop in consumer spending.

Rather than engage in tax cuts, political leaders in Canada should be increasing investment in social programmes like unemployment insurance, social assistance and child tax benefits to get low and modest income people spending again, he argues.

“You want to channel money down to people who are already cash constrained, who are basically going to go and spend all of that money right away as opposed to saving it or trying to pay down debt with it,” Lee said.

Statistics Canada has reported that the country’s unemployment rate is as high as 11.7 if one includes those unemployed who are not actively looking for work either because they are discouraged or anticipate returning to a job.

“The banks will take care of themselves if the underlying situation can improve. But you don’t help the underlying economic situation by starting with the banks, I think it is the opposite case and you need to deal with the macroeconomic first,” added Lee.