The Bank of Canada and the Harper government are pulling in opposite directions. The casualty is the Canadian economy.
The federal government is tightening fiscal policy despite the economy being weak; the central bank is dropping interest rates because the economy is weak.
Neither the bank nor the government wants a weak economy. The Harperites have entered an election campaign with a sputtering economy mocking their claims of excellent economic performance. The bank lowered interest rates in January, driving down the value of the Canadian dollar, hoping for export-led growth. But quicker growth didn't happen; in fact, the economy got weaker. So, the bank has doubled down on the low-dollar, export-led growth strategy, lowering interest rates again last week.
If federal fiscal policy were more expansionary – that is, if Ottawa were running a modest deficit – the bank might have held off these interest rate decisions. Instead, the bank, and the bank alone, is trying to get the economy out of the hospital while Dr. Harper and his aides are busy saying the patient needs more budget-balancing medicine. The family allowance cheques – a.k.a. Universal Child Care Benefits – arriving in this week's mail do not constitute economic stimulus.
The Canadian economy, replete with discouraging trade and current account deficits, was supposed to climb aboard the engine of the U.S. economy. Instead, U.S. growth has been disappointing – faster than Canada's to be sure, but less than anticipated.
Low interest rates and sagging dollar: We've seen this combination before, and it did nothing for Canadian competitiveness. It made exports easier for some industries, but not because they became more productive. They locked themselves into depending on a low-valued currency. The risk is that history will repeat itself.
Ever-lower interest rates will likely inflate further the housing markets in Toronto and Vancouver, which are already out of sight for many would-be buyers. In a perverse way, these housing markets, which show all the signs of a bubble waiting to deflate (remember the Tokyo real estate collapse), are the strong spots of a wobbly economy weakened, in part, by the collapse of the world price of oil and other commodities.
These prices are not likely to recover any time soon, given world supply-and-demand, which means a sustained struggle for the Canadian economy. To this must be added factors no politician likes to address, including the long-term drag on economic growth from an aging population.
Some of the hopes for long-term growth have been blasted or downgraded. Liquefied natural gas in British Columbia will be, at best, a small industry compared with what had been expected. Bitumen in Alberta suffers from a declining price for oil and an inability to find new ways of shipping product out of Canada. All the major pipeline projects for bitumen – Keystone XL, Northern Gateway, Trans Mountain, East-West – are blocked, or at least tied up with interminable approval procedures or aboriginal opposition. So are other projects, such as dams or fracking, opposed by some aboriginals and environmentalists.
Getting to "yes" for major natural resource projects is now arduous, expensive and extremely time consuming, which suits those who want projects killed, but which leaves the economy enfeebled. Regulatory approval of projects by authorized agencies is now dismissed by critics who demand that the tests of "social licence" be applied, which means that the critics believe they should decide what should proceed, how and when – a breathtaking arrogation.
Lower taxes and a balanced (sort of) federal budget were supposed to be an elixir for sustained economic growth. This was the Harper government's mantra. As the election campaign begins, the mantra has fallen apart in fact, if not in rhetoric. Having been weakened by doleful economic facts, the mantra will be adjusted to warnings that things would be worse under the unreliable Liberals and dangerous New Democrats.
Unemployment is higher than in the United States. The Canadian dollar is sagging. Growth is anemic, with the yearly rate now expected to be a shade above 1 per cent. Making a silk purse out of that sow's ear will provide the Conservatives with a major political challenge.
Maybe, but likely not, the central bank's effort to stimulate growth in the face of the Conservatives' tight fiscal policy and low commodity prices will begin to bear fruit before the Oct. 19 election. The Conservatives would be grateful for that.