Harper eyes job creation with softened tone on deficit

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Prime Minister Stephen Harper is shifting the focus of his economic priorities toward jobs as Canada gets hit by spiralling global woes threatening to drag down growth, government revenues and the nation's labour numbers.

Mr. Harper's change in tone, delivered in a Parliament Hill speech Thursday, comes at a time when world leaders – including U.S. President Barack Obama – are increasingly coming to view unemployment as one of the biggest challenges to economic recovery.

With ammunition running out as he exhausts policy options for jolting the U.S. economy, Mr. Obama announced a new high-stakes jobs plan worth nearly $450-billion (U.S.). Gambling that another big round of stimulus can turn the jobs tide and finally find a way to turn the corner on the U.S. recession, the President is urging Congress to prevent a "national crisis" by approving his proposed mix of payroll tax cuts for employers and tax hikes for higher-income Americans.

While Canada's economy has been healthier than most, it's hardly immune. In his Parliament Hill speech, Mr. Harper acknowledged his government must be "flexible" – meaning further Canadian stimulus measures may also be required if the economy worsens. That's a clear change in tone from earlier this year, when erasing the deficit was the dominant Conservative priority after two years of stimulus spending.

"The word 'flexible' I found very interesting because generally the government has been of a fairly one-track mind," said BMO deputy chief economist Doug Porter. "I welcome that flexibility because if the U.S. economy does get into much more difficulty, I think it would be the wrong thing to single-mindedly try to drive the deficit down sharply."

Rising unemployment would force tough political choices on the Conservative government over how best to erase the federal deficit while protecting jobs. Canada's 2012 budget is supposed to provide the first clear outline of where Ottawa will find $4-billion in annual spending cuts to balance the books by the 2014-15 fiscal year. Next year's budget was also expected to mark the end of several short-term stimulus measures, such as tax incentives to boost hiring and retrofit homes.

Analysts are increasingly suggesting that some of those stimulus measures may need to continue – a possibility the Harper government acknowledges. "In managing the economy, circumstances demand that we listen carefully to Canadians and that we be flexible when necessary," said Mr. Harper.

Statistics Canada will release job numbers for August that may mask the impact of this slower growth because teachers returning to school tend to give August job numbers an artificial boost.

Many economists expect Friday's Canadian numbers for August to show modest job gains and no change to Canada's unemployment rate of 7.2 per cent, but there are suggestions that rate will tick upward later this year. Returning to pre-recession levels of about 6 per cent now seems extremely remote, as a decline in construction jobs is expected over the coming year as previous stimulus spending unwinds.

While the number of jobs lost during the recession has since been recouped, youth in particular have seen little of the job gains during the recovery.

Among specific sectors, employment has grown in construction, health care and social assistance, accommodation and food, and professional, scientific and technical services since early 2008. It has not recovered in manufacturing, agriculture, forestry and mining, and business and building support services.

Finance Minister Jim Flaherty will be in Marseille, France this weekend to meet with his G8 counterparts, where the discussion is expected to focus on concern over the economies of Europe and the United States.

Mr. Flaherty said leaders of struggling economies should remain focused on the hard decisions that need to be taken, including measures to reduce government debt and deficits. "It's fraught with danger to keep kicking the can down the road," he said. "Delay is the enemy."

Derek Burleton, TD Bank deputy chief economist, said Thursday that the employment picture will worsen later this year.

"You're going to get employment weakening," he said. "I do see the risk that the unemployment rate rises to 7.5 per cent by the fourth quarter. Again, it is consistent with very modest growth over the remainder of this year."

Economists polled by Bloomberg expect the jobless rate for August will have stayed put at 7.2 per cent, with employers creating about 22,000 jobs amid a seasonal rebound in education-related hiring. It will come after employment growth stalled in July.

National Bank chief economist Stéfane Marion is an outlier, predicting Friday's numbers will show Canada's economy lost 5,000 jobs in August.