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Americans are still fretting over a potential recession, but the economy is actually faring much better than most people think, according to Nobel economist Paul Krugman.
In an op-ed for the New York Times on Monday, Krugman pointed to widespread pessimism about the US economy, despite indicators that show economic activity is fairly healthy.
Though 93% of CEOs expect the economy to tip into a recession within the next 18 months, according to the Conference Board’s latest survey, Krugman noted that the job market is the strongest it’s been in decades, with the US adding 6 million jobs since December 2021. The unemployment rate has also dropped to its lowest level since the 1960s, while job satisfaction is at an all-time-high.
And while inflation was a top concern for Americans in 2022, prices have been coming down for much of the past year, cooling to 4.9% in the April Consumer Price Index report. That’s over 500 basis-points lower from where prices where in June 2022, when inflation notched a 41-year-high of 9.1%.
“The interesting question now is why, at least according to some surveys, the public remains very negative on the economy – as negative as it has been in the past amid severe economic downturns – even though those recession calls were clearly a false alarm, and the economy is actually looking remarkably strong,” Krugman said.
Markets grew particularly skittish about recession risks last year when the US slipped into a technical recession defined by two straight quarters of negative GDP growth.
But official recessions are declared by the National Bureau of Economic Research, which uses other data to determine if the US is truly in a recession. So far, those other indicators say that it is not, Krugman said.
He speculated that the gloomy outlook on the economy stemmed from Americans who were assuming others were facing economic difficulties, though most people themselves are still dealing with upbeat personal fortunes. The odds of a future recession have also been widely publicized through media reports, which could be creating a negative bias.
“While many Americans tell surveys that things are terrible – which says something about how people respond to surveys and where they get their information, this doesn’t contradict positive assessment,” Krugman added.
Still, other experts have warned a downturn is still possible this year as the Fed signals it will keep interest rates high. Bank of America strategists said a downturn could start as soon as this quarter, judging by a notorious bond market indicator that predicted the recessions of 1990, 2001, and 2008.
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Two weeks of negotiations between the federal and provincial governments and Stellantis have failed to produce a new deal for the NextStar EV battery plant in Windsor, Ont. Ian Lee, an associate professor at Carleton University’s Sprott School of Business, says the economic might of the U.S., coupled with the incentives offered in recent legislation, make it extremely challenging for Canada to compete.
World entering period of scarcity, meaning Canada won’t be able to spend its way to prosperity
The unexpected pick up in Canadian inflation last month — even if it turns out to be a blip — is a fresh reminder that Prime Minister Justin Trudeau’s government is facing a more perilous economic policy landscape going forward, with difficult trade-offs on the horizon.
The natural economic instinct of this government has been generous budget spending and open international migration.
Yet, Trudeau doesn’t need to look much further than Statistics Canada’s inflation numbers or last week’s call from the G7 for global “de-risking” to see how things are changing.
With the world entering a period of scarcity — from more expensive money to supply constraints — the rationale to juice the nation’s economy is weakening.
The housing crisis is a manifestation of that, as are broader price pressures and the Bank of Canada’s historically aggressive run of interest rate hikes.
Trudeau came to power in 2015 on an anti-austerity platform to reverse his Conservative predecessor’s sluggish growth record which, as the Liberals were quick to remind Canadians at the time, was the weakest since R.B. Bennet was prime minister in the 1930s.
The economics were sound at the time, even if the growth dividend didn’t pay off.
Canada’s economy was demand deficient early in Trudeau’s mandate as commodity prices slumped, while the extra spending helped ease financial stability risks by taking some pressure off the Bank of Canada to stoke growth.
Higher international migration drove gains in labour income and provided support to a housing market that was still largely within reach of affordability. Inflation wasn’t a worry. In fact, the concern for policymakers was it may not have been high enough.
New social programs, meanwhile, allowed the government to make significant strides on equality and redistribution — particularly with respect to lowering poverty.
The Trudeau administration’s weighty policy objectives were synergetic to the economic environment. Policies were rowing more or less in the same direction.
The current post-pandemic environment, though, is no longer as accommodating.
While many policymakers and economists still buy into a moderately optimistic outlook, with continued growth and inflation brought into check, less favourable outcomes are increasingly plausible.
There is a real possibility that inflation and interest rates will remain well above pre-pandemic levels, growth becomes more anemic, budget dynamics worsen and the climate transition proves costly.
Instead of working in concert, the government’s three core economic policy objectives — growth, equity and price stability — could become increasingly in conflict.
For example, increasing immigration is a long-term positive for an economy threatened by aging demographics. And more social spending is typically associated with less inequality.
But higher borrowing costs stoked by large increases in population and government spending will impact disproportionately lower income Canadians and young families, potentially creating divisions and threatening new sorts of inequality.
Add energy transition to the mix and national security issues and the landscape becomes a minefield.
The policy arena will be more ambiguous and the government pulled in multiple directions. Policy paralysis, wasted effort and poor allocation of resources are real risks.
There are certain fundamentals and policy guardrails, however, that can help the government navigate this challenge.
First, policymakers should prioritize growing GDP on a per capita basis and increasing productivity over expanding the overall aggregate economy. Both are important, but the former is where true prosperity lies and where Canada is failing. Masking underlying weakness with gains in national income is just a recipe for stagnant wages. Enhanced productivity also helps dampen inflationary pressures.
Second, toolkits and policy precision matter.
For example, supply side solutions are critical to productivity, but policymakers also need to be cognizant of short-term impacts in an inflationary world. Focusing more on economic migration and temporarily slowing the pace of new entrants to allow housing supply to catch up appears a reasonable solution to the current housing crisis.
Another example is industrial policy, which needs to become more sophisticated. Advanced economies will compete in advanced industries, where there is a concentration of R&D and skilled workers. Quick fixes through corporate subsidies, however, are not the answer. Canada needs a modern science and technology architecture that translates ideas into economic outputs, higher wages and better living standards.
The third guardrail is the most Canadian: be reasonable and pragmatic.
This seems obvious but we should not take this principle for granted, particularly as we rush (rightly) to meet ambitious climate targets. Canada remains a resource economy. The sector pays a lot of bills, keeps our currency stable and government finances flush with cash.
It’s also where any global power we may have as a nation lies. That makes an orderly climate transition paramount.
Theo Argitis is managing partner at Compass Rose Group. Robert Asselin is senior vice-president, policy at the Business Council of Canada.
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A new solar panel array is installed in Scugog, Ont. on April 27, 2016.Frank Gunn/The Canadian Press
Executives from an array of low-carbon industries are attempting a show of strength on Parliament Hill this week, at a precarious point in Canada’s efforts to keep pace with the United States and other countries prioritizing low-carbon economic growth.
Although representatives of specific sectors frequently show up in Ottawa to press members of Parliament for support, the gathering on Tuesday and Wednesday – featuring approximately 45 leaders of companies, industry associations, organized labour and Indigenous business groups – is aiming for something wider and more symbolic.
Based on interviews with some of those representatives and with the climate-focused Ivey Foundation – which along with the non-governmental organizations Clean Energy Canada and the Transition Accelerator is co-ordinating the effort – the idea is to have different corners of the clean-economy transition form a united front in a way they have not previously.
Branded New Economy Canada, it’s something of an experiment in whether co-ordination can build a degree of cross-partisan consensus about the need to implement regulatory reforms, industrial subsidies and financing mechanisms, and other measures to expedite that transition.
The list of participants has clearly been curated to showcase the range of economic activity that organizers hope will prove irresistible, even to politicians for whom Canada’s emissions-reduction commitments may not be a priority.
It spans from renewable electricity producers such as Northland Power Inc. and energy storage players such as Hydrostor Inc., to mining giants including Teck Resources Ltd. TECK-B-T and the more junior E3 Lithium Inc. ETL-X, to environmental, social and governance-focused asset managers such as Addenda Capital Inc. And it runs the gamut from Canadian startups to domestic wings of multinationals, such as GE Canada.
Participating industry organizations represent both relatively new segments of the economy (the Battery Metals Association of Canada) and established sectors with decarbonization ambitions (the Cement Association of Canada). Others range from the First Nations Major Project Coalition to the International Brotherhood of Electrical Workers.
The plan for them in Ottawa is to break off into small groups, each featuring a cross-section of sectors, which will sit down with MPs and political staff to press their case. Organizers said they have secured meetings with members of each federal party.
That in itself may be a small victory. Part of the impetus behind the event is to light a fire under the governing Liberals to swiftly follow up on commitments in this spring’s budget to stay competitive with the United States as it rolls out hundreds of billions of dollars in clean-economy spending through its Inflation Reduction Act. But there is also a perceived need to engage with the opposition Conservatives, who under Pierre Poilievre’s leadership have thus far displayed little interest in climate-related policies, to try to ensure they maintain such efforts if they win government in the coming years.
“When I look at what we build, these are multidecade projects that involve hundreds of millions of dollars,” said Colleen Giroux-Schmidt, a vice-president with another participant, Quebec-based Innergex Renewable Energy Inc. That points, she suggested, to the need for investors to have confidence that policies will be durable through changes in government.
The program for a New Economy Canada reception being held on Tuesday evening also seems intended to catch the Tories’ attention. One of its featured speakers is former Conservative MP Joe Preston, who now serves as mayor of St. Thomas, Ont. – home to the massive new Volkswagen electric-vehicle battery plant that Ottawa will heavily subsidize.
Somewhat less clear is the precise message that companies will be delivering to MPs during all their meetings – or how New Economy Canada might evolve after this week’s initial event.
It is, by the acknowledgment of those involved, a fairly ad hoc undertaking. And there is recognition that messages must be kept fairly broad, given differing policy needs of the sectors involved, and limited work put in thus far to determine where they intersect.
Some of the companies are nevertheless eager to seize the chance to convey to policy makers their own key messages, applicable to the fields they’re in, if not the entire sweep of low-carbon industries.
Nouveau Monde Graphite Inc. vice-president Julie Paquet – whose company touts its sustainable mining practices but whose first major project, in Quebec, has attracted local concern about environmental effects – expressed hope about being able to “deconstruct some of the myths that might be plaguing some of our companies.” That includes, she said, trying to persuade left-of-centre MPs to set aside pre-existing impressions of how the mining sector operates.
Addenda Capital, meanwhile, sees some opportunity to push for policies that provide greater accountability and transparency to guide investors through myriad net-zero and ESG commitments currently being made. One example, cited by senior director Andrea Moffat, is trying to get the government to act on the framework for a green taxonomy – a rulebook for what qualifies as a sustainable investment – that was developed last year by a government-appointed expert panel.
Then there is Alberta’s Kiwetinohk Energy Corp. KEC-T, which occupies a unique place as a self-described energy transition company that produces oil and gas, but is also developing renewables and wants to primarily become a supplier of low-emissions electricity. “I honestly don’t know why we were invited to this particular event,” chief executive Pat Carlson said, but he’s going because he sees it as an opportunity to educate politicians about his company’s unusual story and ambitions.
Whether it coalesces into a coherent case – or offers lessons about what works and doesn’t, in terms of enlightening politicians about the path to clean-economy competitiveness – will seemingly determine if the effort proves a one-off or develops into something more structured.
“I don’t think two days in Ottawa will be enough education,” said Ivey Foundation senior adviser Merran Smith. “But we’ll see how it goes and determine next steps.”
For now, there is a feeling among the businesses that at least trying to capture politicians’ attention with a shared vision, rather than advancing interests as smaller emerging sectors that don’t all yet have as much clout on their own, is overdue.
“We tend to be siloed into our different segments of the economy,” said Ms. Giroux-Schmidt, of Innergex. “We’ve been looking for a unified voice like this for quite a while.”
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