The recession, which will preoccupy this week's G8-plus meeting in Italy, will change Canada not just in the short term but also over the long haul.
The changes will include deepening Canada's economic dependence on natural resources, battering the country's manufacturing sector, making regrettable our excessive dependence on the U.S. market, widening still further the economic gaps between West and East, and straining the financing of federal-provincial programs.
A recession is technically defined as two quarters with negative economic growth. Our economy contracted 3.7 per cent in the fourth quarter of 2008, 5.4 per cent in the first quarter of 2009, and perhaps another 2.5 per cent to 3 per cent in the second quarter. Growth thereafter will be sluggish for at least 18 months - unless the world slips back into recession. Economist Dale Orr usefully notes that, even if strong growth returns, we will have lost the equivalent of two years. Put another way, Canadians in 2014 will be, on average, $2,400 poorer than if there'd been no recession.
Yes, as Prime Minister Stephen Harper correctly tells Canadians, we're better off than others. Nonetheless, we're adding an estimated $125-billion in federal borrowing in the next three years, to which must be added the billions and billions being borrowed by provincial governments.
In theory, governments circa 2012-2013 (or before) should be starting to retrench government spending (and raising taxes) to get the deficit under control. But guess what's looming? The renewal of the 10-year federal-provincial agreement on health care.
That agreement, negotiated by Paul Martin in 2004, is pumping $41-billion into health care, indexed at 6 per cent (!) a year over 10 years. It was brokered when Ottawa had lots of money to splash around. That won't be remotely the situation when the deal is renegotiated.
Future health-care spending is just one way the recession, and the debt buildup to constrain it, will present future Canadian governments with excruciating decisions.
Other tough calls will come from the way the recession and its consequences are reshaping Canada's federation.
For generations, Ontario was the country's milch cow. It has not been so for a while, and its plight will worsen. Ontario manufacturing will continue to be bashed by offshore competition, a weak U.S. market, higher energy costs (for hydro and oil) and old policies that still take money out of the province for redistribution elsewhere.
As energy prices weigh down Ontario's economy, they will make more buoyant those of Alberta and Saskatchewan. The outlook for natural gas prices is grim - a new U.S. government report found that country's reserves to be much higher than thought – but oil prices will rise, perhaps very fast.
With manufacturing clobbered, the Canadian economy will be even more dependent on two sectors: energy and other primary materials, and financials. We might have developed something interesting in clean technology, but our climate-change policies were so timid and slow that other countries stole a march on us.
Of longer term concern, Canada is locked in an economic embrace with a declining power, the United States. That country's problems are staggering, starting with household debt that, although decreasing slightly, remains at 130 per cent of disposable income, more than twice the level in 1974.
People are in debt, companies are in debt, and the U.S. government is in debt beyond anyone's imagination, with more spending (for stimulus, health care and climate change) adding to the already unimaginable totals. And the U.S. political system shows no signs whatsoever of raising taxes or cutting spending even to begin to turn these mounting debts around.
No wonder discussion is intensifying about a new world reserve currency, since who really trusts the U.S. to stop living beyond its means? We might not like this in Canada, but China's influence is growing and that of the U.S. is waning. From 2008 to 2010, the U.S., under an optimistic scenario, will grow only 0.3 per cent; China's will increase 20 per cent to 25 per cent.
Canada doesn't even have a China policy, and it hasn't got one for the emerging markets.
The recession is changing the world and the internal dynamics of Canada, whether or not we know it.
