Canada's wake-up call has arrived with all the bad economic news – the falling loonie (which raises the cost of living), collapsing oil and commodity prices, a serious bear stock market, reduced government revenues, and weakening employment performance.
But bad news can include good news – and the upside is that the new government and the watching public cannot fail but see what they face. The harsh forces now at work can no longer go unnoticed. The government, four months into its mandate, is getting a clear idea of the challenges ahead – and that will help it explain to Canadians what has to be done.
The last five years were largely lost ones for the Canadian economy, which has suffered from three major vulnerabilities:
- Our growing household-sector debt and (because we have failed to live within our means) foreign borrowing.
- China’s impact on oil and commodity prices, which stems from the fact that a once-explosive economy is growing more slowly and reducing its investment in physical capital.
- Finally, the looming – and unavoidable – end to the current U.S. expansion.
Some of these troubles were self-inflicted; others came from outside, but were at least partly foreseeable. Either way, the end result is very, very real. What matters now is to assess where we are and find the right policy and political ways forward.
Canada was unprepared to deal with the first two problems. It's urgent that we get ready for the third by using U.S. growth while it lasts.
A hard global environment
The global economy is still being held back by two huge deflationary, or recessionary, drags:
Continual aftershocks from 2008:
We forget the world never really came out of the Great Depression of the 1930s – rather, the economy was revived by a global war. Nor has Japan really recovered from its 25 years of economic malaise. In both cases, the premature withdrawal of measures to stimulate a recovery brought recession back.
This helps to explain why the U.S. Federal Reserve Bank has been so cautious about doing the same since the 2008 meltdown – and, now that it has, why Financial Times columnist Martin Wolf thinks the increase perhaps was a blunder.
He may be right, but for once I think maybe not – just as, unlike some commentators, I don't feel the Fed's action is the prime suspect in triggering the current global stock setbacks.
The China factor:
The overwhelming shock of China's economic rise has now turned into the shock of its lowering growth adjustments. Wendy Dobson, a China expert at the University of Toronto's Rotman School of Business and the author of Canada, China, and Rising Asia: A Strategic Proposal, points out that, while Western economies make mistakes, they have way-forward charts. For China there are no charts for moving 1.4 billion people forward, with an authoritarian government and an economy hindered by the fact it's partly state-owned. We don't like today's destabilized Middle East. A politically destabilized China could be much worse.
But Canada has to look out for itself in a world of insufficient demand. Just as it needs what the Prime Minister calls "sunny ways," it needs to be deeply rooted in reality and what works.
The way forward
Right now Canada needs major initiatives in three key areas: public infrastructure, natural-resource infrastructure and incentives designed to foster the creation of wealth.
Entering the last election, Canada had none but emerged with a government that supports the first and promises a more positive approach to First Nations and climate change, which could help with the second. Of course, neither it nor the other parties advocated anything to help us start living within our means.
In the immediate aftermath of the financial crisis, Canada famously did almost all the right things, using the strengths from its Brian Mulroney-Jean Chrétien heritage to overcome the worst of the fallout. The Bank of Canada under Mark Carney edged interest rates up 75 basis points – an amazing accomplishment compared with the rest of the Group of Seven developed nations. The bank no doubt wanted to do more, but was held back by elections and volatile external challenges.
After the return of majority government in 2011, there was a shift, but for political, not economic, purposes. And those changes rested on an unsustainable foundation: too much foreign borrowing and too much household-sector debt.
Now, the rough new economic world Canada faces will be much more powerful in shaping future policy. No matter what the Liberal government does, any tendency to live beyond its means will be shaped more by market forces than by policies.
The Liberals put forward two positive ideas: enhanced infrastructure financed by a larger deficit, and better relations with First Nations, which could help to get big pipeline and resource projects moving.
But the centrepiece of its platform – a better life for Canada's middle class – requires some heavy lifting on the economy.
The need for change
Canada's overall policy is badly unbalanced: There is too much stimulus from private credit and too little from federal deficits. Interest rates are so low, housing prices in some areas so high and so many households owe so much money that the Bank of Canada is now essentially powerless to provide relief when the next recession comes, as inevitably it will. A recent poll shows that Canadians' prime financial goal is to cut their debt, which would help even if it slows consumer demand in the process.
So, now is the time for the Bank of Canada to spur debt reduction not only by matching the Federal Reserve rate rises but perhaps even by retracting the two unnecessary decreases it made last year.
As for the lower dollar, by raising prices it tightens domestic spending while at the same time spurring foreign demand for Canadian goods – not that earning less for what you sell is the fast track to prosperity.
It was heartening that the bank at least resisted the urge to cut interest rates yet again this month. After seeing the federal budget, which is expected to land next month, it should consider an early 25-basis-point rate rise. Such an increase would signal a better sense of policy reality than its actions and talk indicated before a speech by bank governor Stephen Poloz early in the new year. In it, he essentially acknowledged for the first time that we are in a world beyond monetary-policy help, one that will require hard and painful adjustments.
Canada must use the stimulus provided by the fiscal deficit the Liberals have promised to raise interest rates slowly to help achieve three goals: a stronger dollar, less inflation, somewhat lower household-sector debt and more moderate housing prices.
Currency-exchange and interest rates are good or bad depending on whether they reflect a sound policy framework, and Canada's overall framework has been askew for three to four years.
Too little stimulus has been focused on the economy's true challenge: building longer-term productivity and expanding the supply capacity. Too much has gone to creating jobs in other countries because Canada has spent billions more on imports than it earned from exports.
The possibility of more personal financial prudence is a positive sign, but right now the dollar and interest rates are both too low. The federal government and central bank need to work carefully together to achieve great balance, with less risk than we are now running and a bigger cushion for the future.
What the policies should be
And how do we build that cushion? Imagine the nation's economic policy as a stool that is supported by three legs, and the first is public infrastructure, especially transit and communications. The government is making a start but the investment will need to be bigger than it has promised, and focused almost totally on what will make the economy more competitive in the longer term.
Leg two is pipeline infrastructure. Here the Liberals can benefit from their approach to policy on indigenous affairs and global warming – issues the previous federal and Alberta governments, along with the oil and pipeline industries, are seen by many to have blown over the past decade. The third leg should should be a powerful incentive for the best people and for businesses that are bold enough to expand in the face of uncertain times.
The old way to promote something like this was through tax breaks or direct government spending, and there is still a role for both approaches. But something big and new is needed on the globally competitive goods-and-services front to match the infrastructure incentives.
We need a creative way to reward those who create wealth and jobs – and then put their gains back into the Canadian economy.
Serious bargaining ahead
Canada's economics and politics tend to be more regional than national, whereas elections that bring about change are usually national, like the one last October. The provinces and the First Nations have needs – and leverage – so overcoming their differences will require political leadership, based on mutual accommodation.
Today's regional economic tensions are not so severe that they have the potential to match the political ones witnessed when the Prime Minister's father was in office, but it is still a situation difficult for any federal government to manage alone. The eruption of protest against the Energy East proposal for a 4,600-kilometre pipeline to carry about a million barrels of oil a day from Alberta and Saskatchewan to refineries in the East illustrates what may lie ahead.
Back in 1967, there was a void in national leadership before the arrival of Pierre Trudeau. Premiers John Robarts of Ontario and Daniel Johnson of Quebec stepped in, calling their provincial colleagues to the Confederation for Tomorrow Conference.
Perhaps it's time the premiers of the four largest provinces (Ontario, Quebec, Alberta and British Columbia) did something similar: the Canadian Economy of Tomorrow Conference.
The future
Every Canadian prime minister faces three primary challenges: the economy, national unity and the United States. The wider world has now added two new challenges: security and desperate people fleeing failed states and economies and the effects of global warming.
Pierre Trudeau saved Canada from separatism. Justin Trudeau promises to preserve its identity as a nation that relies on – and thrives because of – mutual accommodation. But the second Trudeau also needs to become the second Sir John A. Macdonald – the bold builder of a stronger coast-to-coast Canadian economy he can take to the world and bring the world to. It is a huge moment both for him and for Canada. The urgent question now is whether he and we can seize it.
The scale of the oil-price and global stock market collapse must be seen as wild cards that would not normally threaten the U.S. and global economies – but could do so. If they do, it does not mean the Fed was wrong to test the waters with a 25 basis-point rise in interest rates. What it says is how very hard it is to get past the two big global drags – the post-Lehman aftershocks and the challenge of adjusting to China's new path.
Heavy lifting and much need for mutual accommodation lie ahead. The key is to get on the right path with a lot of honest and open discussion. In all likelihood, it will take rest of 2016 to get started.
The politics can be supportive if what is needed is well explained – the right policies should bring little political danger from the left and potential support from moderate Conservatives on the right, based not on ideology or wedge politics but on what works.
William A. Macdonald is president of W.A. Macdonald Associates Inc., and has an extensive record of public service. To spark discussion of the nation's future, he and associate William R.K. Innes have created The Canadian Narrative Project along with Trent University. For more, visit http://www.canadiandifference.ca