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The “political action committee” largely intended as a response to ads attack Prime Minister Stephen Harper lasted a grand total of three-and-a-half days. (Chris Young/The Canadian Press)
The “political action committee” largely intended as a response to ads attack Prime Minister Stephen Harper lasted a grand total of three-and-a-half days. (Chris Young/The Canadian Press)

Analysis

Downturn bad news for Harper with federal election looming Add to ...

Three months from an election, Bank of Canada Governor Stephen Poloz has delivered an economic assessment that can rile Stephen Harper’s political election plans: It raises the prospect that the country is in recession, and that the federal budget surplus has turned to deficit.

It’s not just that the economy is so surprisingly weak that Mr. Poloz announced another interest-rate cut, the second this year. But that move, and the report that accompanied it, spread the notion of a worrying, across-the-economy stall, and undermined some of the symbols that the Prime Minister uses to bolster his most prized political asset: his reputation as an economic manager.

Canada might already be in recession, at a time when the United States isn’t. The Bank of Canada revised its overall growth rate for 2015 to an anemic 1 per cent. And that means the slim budget surplus Finance Minister Joe Oliver projected in April has been washed away, so the budget is probably now, albeit just slightly, in the red.

This is politics: Mr. Harper took credit for economic successes, and he’ll take blame if things go awry. He sells himself as a safe economic manager in an uncertain world, and that’s critical to his election message. The Conservatives portray opponents as risky, casting Thomas Mulcair’s NDP as reckless spenders and Liberal Leader Justin Trudeau as a callow novice.

A deficit, even one so small it’s economically insignificant, is a major symbolic blow. Mr. Harper’s government trumpeted April’s balanced budget as a major achievement. The Conservatives are running commercials ridiculing Mr. Trudeau for saying that (with economic growth) “the budget will balance itself.” Now, Liberals can counter that the budget isn’t balanced at all.

On Wednesday, opponents were rubbing their hands at the thought that that Mr. Harper might lose his economic-manager edge. The bad economic news also helps them argue that Mr. Harper failed to act, that while the central bank cut rates twice to try to forestall recession, the government tinkered with budget cuts, rather than stimulating economic growth.

So far, the government’s message has been twofold. First, denial: There’s no recession, and there’s no deficit. Second, the problems are coming from abroad – foreign economic headwinds that are buffeting Canada.

But that doesn’t quite fit with what Mr. Poloz said Wednesday. The Bank of Canada reported that the economy contracted in each of the first two quarters of 2015, which meets a traditional technical definition of recession, even if Mr. Poloz avoided the term. The central bank also trimmed growth projections by almost a percentage point of GDP, which, Bank of Montreal chief economist Doug Porter told The Globe and Mail, would cut $3-billion off the budget balance, pushing it into a tiny deficit.

Mr. Oliver, in a brief statement issued Wednesday, pointed to negative impacts caused abroad, such as Greece’s debt crisis and China’s market volatility, on top of lower oil prices. And those are factors, of course.

But just as Mr. Poloz was delivering his unsettling assessment of Canada’s economy, and cutting rates for a second time, his American counterpart, U.S. Federal Reserve Chair Janet Yellen, was testifying before Congress that she’s still on track to raise rates this year because of a strengthening U.S. economy.

That’s a powerful symbol. Canadians judge the economy by their own pocketbook, but also by what they hear about what’s happening elsewhere, and the U.S. is, for Canadians, the main yardstick. The opposition parties are already calling it a made-in-Canada recession. It’s not just the oil shock, either. Mr. Poloz said there’s also a “puzzling” stall in non-energy exports, too.

Politically, all that has the potential to upset Conservative election plans. Governments don’t micro-control economies, but they do reap credit or blame. Usually, a little economic uncertainty is good for them: They want voters to ask which leader can steer the country through it, figuring most will pick Mr. Harper. But talk of a recession, and a surplus unravelling into deficit, can change that equation.

It’s July, and Conservative strategists will hope those notions don’t sink deeply into the thoughts of distracted voters. But three months from election day, it’s ample reason for them to worry.

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Follow on Twitter: @camrclark

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