On the days the Bank of Canada sets policy, my inbox fills with commentary from various economists and sundry currency analysts.
This week’s commentariat included a new addition. Trevin Stratton, chief economist at the Canadian Chamber of Commerce, expressed dismay over the central bank’s revised outlook, which assumes the economy essentially stalled in the fourth quarter, and foresees only lacklustre growth of 1.6 per cent in 2020.
In a shift, Stephen Poloz, governor of the Bank of Canada, told reporters on Jan. 22 that interest-rate cuts might be necessary to offset deflationary pressures. For now, the central bank thinks the economy will pull out of this current soft patch, but the slope of the recovery will be gradual.
And that’s the problem. The central bank also raised its estimate of the economy’s non-inflationary speed limit to two per cent. The gap between that measure and the 2020 outlook suggests that Canada, despite its all-star potential, is performing like a third-liner.
“We have entered an era of low interest rates and sluggish growth as our economy has not been able to build any sustainable momentum,” said Stratton. “This is why the Canadian business community continues to press the government for a national economic strategy that can address our declining competitiveness.”
The biggest of the Big Business lobbies have upped their games over the past couple of months. In November, the Business Council of Canada, which represents the leaders of the country’s largest companies, released a report on what it thinks it will take to get the economy out of third gear. At the end of this month, the Chamber is hosting an “economic summit” in Toronto that will confront what it describes as “monumental transformation.”
Corporate leaders may have discovered what complacency gets you: nothing. Business was a non-entity in last year’s election campaign, meaning every member of Parliament has a mandate to ignore the concerns of the hiring class if he or she desires.
Another reading of Corporate Canada’s newfound urgency is that its members sense that the economy has drifted badly off course. “One month isn’t a trend,” said Goldy Hyder, head of the Business Council of Canada, when Statistics Canada reported a big drop in hiring in November, “but it’s important nonetheless to get ahead of things starting with having an actual economic plan for growth.”
One month wasn’t a trend; hiring rebounded in December.
Still, as the central bank observed, “job creation has slowed,” albeit at levels that are consistent with full employment. Poloz and his deputies also expressed concern over the trajectory of business investment, consumer confidence, and household spending. The momentum that resulted in the addition of more than one million jobs in Justin Trudeau’s first term as prime minister is petering out.
Bottom line: better-than-sluggish growth in 2020 is going to require stimulus of some kind. The question is, who should provide it?
In the fall, the Bank of Canada nudged finance ministers to do it. The Oct. 30 policy statement said officials would be paying particular attention to “fiscal policy developments.” If that was too ambiguous, Poloz told BNN Bloomberg later that day that $5 billion of fiscal stimulus was as good as a quarter-point cut in interest rates. The implication was that the central bank had been doing most of the work for years and that the time had come for others to help out.
Finance Minister Bill Morneau, for one, appears to have taken the hint. With interest rates already very low, the ability of central banks “to be effective in the face of challenges is different than it was in the last real challenge,” he told Bloomberg Television at the World Economic Forum in Davos, Switzerland, referring to the Great Recession. “That’s a reflection back on people like me,” Morneau added. “The world we’re in today is not the same as when rates were at a higher starting point.”
One of the first things Morneau did after the election was propose a modest income-tax cut worth about $6 billion per year once fully implemented. That sounded like it would take some pressure off the central bank, but rules of the thumb don’t always hold up in the real world. Poloz said the tax reduction probably will have only a modest impact on economic growth.
“It’s a targeted tax cut as opposed to a general fiscal stimulus,” he said.
At the same time, reduced spending in Ontario and Alberta will offset increased federal stimulus. The Bank of Canada said “fiscal tightening” in these provinces might partially explain weaker consumer confidence. Morneau probably also is near his limit, as the Parliamentary Budget Officer predicts he will struggle to keep his promise to shrink debt as a percentage of gross domestic product.
“There is zero net incremental fiscal stimulus in Canada,” said Derek Holt, an economist at Bank of Nova Scotia, which has been calling for lower interest rates since the fall. “The onus is on the BoC to step up to the plate if stimulus is needed.”
It might be possible to revive the economy without spending more money or tempting households to taken on more debt.
In the fall of 2018, the Trudeau government promised to ease the regulatory burden, in part by ordering regulators to take the economy into account when setting new rules. But little has happened since, and it’s not obvious that anyone in Ottawa cares. Ryan Greer, a policy director at the Chamber, said the sight of the federal government getting serious about de-regulation would be a “game-changer” for business investment.
The same goes for inter-provincial trade barriers. The International Monetary Fund estimates the free trade within Canada would increase per capita GDP by almost four per cent, massive stimulus that could be paid for with political capital, rather than more debt.
“That’s a huge number,” Poloz said at an event in Vancouver this month. “That’s free money, lying there on the sidewalk and everybody is refusing to pick it up.”
•Email: kcarmichael@postmedia.com |
