The economic forecast for Canada calls for pain. While the country’s banking system is in relatively good shape and we’re one of the best spots in the OECD, there’s no escaping the downturn in consumer spending here, and, more importantly, in the United States. The energy, forestry and auto sectors account for more than half of Canadian export revenues, and they depend on people having money to spend. Toby Auterson, a senior economist with the Economist Intelligence Unit, doesn’t see things improving until late 2010, possibly even 2011.
Meantime, Canada may have to rely on a fairly rosy scenario to escape recession. That includes a settling of global financial markets, demand from emerging economies offsetting a decline in traditional export markets, and some smart monetary and fiscal policy changes. We’ve seen what effect cutting interest rates has: quite little, since there’s still a premium attached to wholesale lending. That leaves it up to the government to find ways to spur the economy, ideally by cutting taxes and boosting infrastructure spending. But this must be done quickly, because fiscal policy change is inherently slow.
The government is also considering subsidizing certain key industries, namely the auto sector. While recognizing the political expediency of such actions, we caution that these are only short-term fixes. Industries that need government money to survive must be restructured to become competitive again. Job and salary cuts are inevitable. And if the U.S. offers a multibillion-dollar bailout of the Big Three, it could require that they preserve American jobs. Where will they cut? High-cost Canada is a likely destination.
Clearly, any bailouts must come with limits, but government has a role to play in easing the economy through the troughs and the peaks. Short-term incentives help keep the economy ticking along, and they might be better than having thousands of people immediately join the EI and welfare ranks.
The good news? We’re in a much better position than the U.S. or the U.K. Eleven years of surpluses make dipping into deficits for a year or two a lot more palatable.