A Rocky Road Awaits Conservatives and the Economy
With oil prices in free fall and oil companies scaling back production and a recession looking more and more imminent, the rosy $1.9 billion surplus the Conservatives wanted to campaign on has vanished and is now projected become a $2.3 billion deficit.
The Conservatives have touted the oil sands as a creator for jobs and prosperity but with the oil price collapse, Suncor, one of the giants, has decided to cut $1 billion in capital spending and shed 1,000 jobs – a far cry from the economic boon it was supposed to create.
Sectors outside of oil and the eastern economy remain fragile and with Alberta’s revenue flow dissipating Canada will inevitably be going back into deficit, which TD Bank estimates could be for the next two years. The Conservatives have effectively put all their eggs in one basket and as if the rejection of the keystone pipeline by US President Barack Obama wasn’t enough, our economy may be in more trouble than we think.
The Bank of Canada is Worried
Last night, the Bank of Canada lowered its interest rate from 1% since September 2010 to 0.75%. In the wake of this cut, the Canadian dollar fell 1.5 cents to 81.07 cents US, the lowest its been since April 2009.
“The drop in oil prices is unambiguously negative for the Canadian economy. Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”
The cut is unprecedented, catching many economists off guard, but signals a bumpy ride ahead for our economy, despite the Conservatives’ repeated mantra of economic prudence.
“It is a significant move,” TD Bank economist Derek Burleton told CBC News. “It does show the Bank of Canada is worried about the big drop in the price of oil … and what kind of uncertainty that poses in the next few quarters. I don’t think they are panicking but I do think they’re concerned about some of the uncertainty the recent slump in the price of oil does create for the economy.”
The Bank of Canada also lowered its economic outlook from 2.4% growth to 2.1% – however for the past years the Canadian economy has struggled to catch up to projections.
As Canada’s Economy heads to Peril, The US hasn’t seen this kind of Growth in 11 Years
For the past 6 years, Stephen Harper told Canadians Canada had the strongest economy in the G8. However, growth has been lackluster and economists already became pessimistic last year when the economy failed to reach 2% growth. It remained sluggish for most of the year and is now heading for imminent recession. In contrast, the United States has not only recovered, they are seeing the largest burst in economic growth since 2009. Unemployment has dropped to 5.6% and the growth rate in the US hit 5% in the last quarter alone.
In the meantime, business investment spending rose by an annual 7.2% rate, 2.1 percentage points, outperforming the US government’s estimates.
The Deutsche Bank Sounds the Alarm on Canada’s Looming Debt Crisis
The Deutsche Bank sounded the alarm in early January about Canada’s ballooned real-estate market being the most overvalued in the world, by a rate of 63%, warning it is about to burst on the weight of abnormally high household debt.
The overvaluation of this sector has made the economy more volatile since the dissipated manufacturing sector has been replaced with the construction sector which would crash once the economy is more exposed to price correction, which is more imminent with higher overvaluation.
Add skyrocketing credit card and personal debt to the equation, that has experienced large exponential growth over the last decade and quadrupled auto loan debt to the equation and we could very well be facing a debt crisis.
The Deutsche Bank noted Canada’s overinflated housing market isn’t alone, citing Australia and Norway as other countries that may be facing the same situation given their respective markets are overvalued by over 50%.
Could the Economy be the Tipping Point in the Tight Harper-Trudeau Race This Year?
With the start of an election year, Harper has effectively lost his message of economic prudence and with polls showing a tight race with Liberal Leader Justin Trudeau for 24 Sussex, one can only imagine Harper’s credibility is going to come under fire.
“I think one of the things Canadians expect of their governments is to be fiscally responsible. It’s not particularly fiscally responsible to put all your eggs in the same basket, to pin all your hopes on oil prices remaining high and when they fall being forced to make it up as they go along.”
For their part, Conservative Finance Minister Joe Oliver released a statement affirming “we will balance the budget in 2015.” As an economic slump looms, the Conservatives have opted to delay the budget to April citing the volatility of Canada’s economy.
Delaying the budget only brought more criticism and and skepticism about the government’s ability to manage our economy.
“They’re making it up as they go … I’m a teacher and their excuses are the political equivalent of ‘the dog ate my homework. Oil prices are through the floor, and Mr. Harper has no backup plan. None.”
Despite the weak outlook for Canada’s economy, the government has put aside $3 billion per year which it could use for posting slim surpluses, but wouldn’t be nearly enough for any large campaign promises. The Conservatives haven’t confirmed or denied any intentions to use it but given the volatility of the market any new tax cuts or spending sprees would inevitably lead the government to dip into the contingency fund.
“The conclusion is unambiguous. In the absence of new measures to raise revenue or cut spending, TD is projecting budget deficits in fiscal 2015-16 and 2016-17 as opposed to the surpluses expected at the time of the update,” states a recent report authored by TD senior economist Randall Bartlett.
What can be concluded from this is now isn’t the time to be proposing any large and reckless new spending measures, like the $2 billion income splitting tax cut the Conservatives have already put on the table as a bid to be re-elected. The same would go for many of the new programs the New Democrats are proposing. The Liberals, for their part, haven’t released any policy publicly which places them well for adapting to economic constraints, something former Prime Ministers Jean Chretien and Paul Martin succeeded after inheriting the largest deficit in Canada’s history at the time and converting it to the largest sustained surplus for over a decade which was inherited by the Conservatives in 2006.