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The Globe and Mail

Why the economy could be the Conservatives' toughest opponent

Data suggest the economic weakness is spreading beyond the oil patch into the voter-rich manufacturing heartland of Ontario.


Stephen Harper heads into a lengthy election battle dogged by negative economic indicators and opposition leaders bent on discrediting the Conservative Party's promotion of its leader as a competent manager of the economy.

Liberals, New Democrats and Conservatives agree the prosperity of Canadians – or its decline – will be the key issue in the campaign that is expected to begin officially with the dropping of the writ on Sunday. A spokesman for the Prime Minister says the Tories are "quite comfortable" defending against opposition criticism of Mr. Harper's economic performance.

"In a campaign, especially a longer campaign like this one where it is easier to have a more thoughtful debate and to look at the evidence and the record of the government, I think the facts speak very strongly in favour of the Prime Minister," Kory Teneycke told The Globe and Mail. "And I believe that, given the choice between Stephen Harper, Justin Trudeau, and Thomas Mulcair, as to who is going to make the right decisions for our economy and to keep it in the best shape possible, they will choose the Prime Minister."

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But the economy itself could be the Conservatives' toughest opponent between now and voting day on Oct. 19.

Canada's gross domestic product, the broadest measure of economic activity, shrank 0.2 per cent in May. It was a fifth consecutive monthly decline. And with just one more month of data to come from the first half of the year, it will take a minor miracle for the economy to escape the traditional measure of a recession – a six-month GDP decline.

The economic weakness is widespread, and now stretches far beyond the parts of the country directly affected by the collapse in the price of oil.

May's dismal numbers are a powerful reminder that the economic landscape is not shaping up quite as Mr. Harper and the Conservatives envisioned when they laid the groundwork for their re-election bid earlier this year. Once a sweet spot for the Tories, the economy has become a significant and growing liability. Recession-like conditions threaten the promise of balanced budgets this year and beyond.

The opposition is eager to pounce on such a situation.

Liberal MP Marc Garneau said during a telephone interview that the potential recession has been accompanied by other related problems. Unemployment is high, there are record trade deficits, and Mr. Harper may not be able to keep his promise to balance the budget in this fiscal year, he said.

"His credibility is shot, plain and simple," Mr. Garneau said. "The economy is not going well and there is only one person to blame for that, and that's the Prime Minister of the country. There are external factors that come into play. Some years are better than others. But let's face it, we are now talking about eight deficits in a row."

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Mr. Harper has pointedly tried to deflect criticism in recent days by citing factors far beyond the government's control – a global economic slump and weak prices for oil and other commodities. He has also insisted Ottawa is "well on track" to balance the books in 2015-16 even though tax revenue is taking a hit.

More disquieting for the government is mounting evidence that economic weakness is spreading beyond the oil patch into the voter-rich manufacturing heartland of Ontario.

"Looking at the monthly GDP by industry data suggests that the weakness is more widespread," said Toronto-Dominion Bank senior economist Randall Bartlett. "Industries beyond the energy sector are struggling to gain momentum."

Growth is also slowing in manufacturing, and exports of a wide range of goods are falling, even though the Canadian dollar has lost nearly 8 per cent of its value this year. In May, output declined sharply in manufacturing, mining and utilities.

"There are 400,000 manufacturing jobs that have been lost under Stephen Harper's watch. Those were well-paid jobs, salary enough for a family to live on, and usually came with a pension," Mr. Mulcair, the NDP Leader, told reporters in Campbellton, N.B., on Friday. "We deserve better."

It now looks like the economy was even worse than the 0.5 per cent GDP decline the Bank of Canada had expected. The central bank cut its key interest rate on July 15, citing the "puzzling" weakness of exports outside the energy sector.

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"What's missing is a rebound in the non-energy sector, particularly manufacturing," said Ben Homsy, a fixed-income analyst at Vancouver-based Leith Wheeler Investment Funds. He said the dollar will have to fall further and stay there to boost exports significantly.

Sensitive to the struggles of Ontario's automotive industry, Ottawa made a $59-million loan on Friday to help Toyota upgrade its vehicle assembly plants in Cambridge and Woodstock, Ont. The announcement, matched by a $42-million grant from the Ontario government, was advanced a week to beat the election call.

Nik Nanos, the president of Nanos Research, said his polls show the economy has been the top issue with Canadians since the market meltdown of 2008. And, even if another issue – such as security or ethics or the performance of the party leaders – rises to the fore during the campaign, the state of the economy will still be simmering in the background, he said.

Mr. Harper's track record will be central to the campaign discourse, Mr. Nanos said, and Canadians will be weighing the risk of another Conservative government versus one run by the NDP or the Liberals.

It is not the first time the Conservatives have gone into an election with the economy on the brink of recession. In September and October, 2008, the global economy was in a financial crisis and perched on the brink of a massive recession. The Conservatives still managed to increase their seat count, winning a second minority government.

Economists point out that, as bad as the economy looks now, conditions could improve significantly in the next few months as the weaker dollar begins to spur exports and the U.S. economy gathers momentum. Bank of Montreal chief economist Douglas Porter said he still expects the economy to bounce back in the second half, buoyed by both the United States and increased fiscal spending by Ottawa.

But even without a rebound, the Conservatives are convinced that Canadians will not blame Mr. Harper.

"The global economy and changes in the price of oil and things like this will have a bearing on what happens in the Canadian economy and that's what you're seeing. That's not something that the government can control," Mr. Teneycke said. "What we can control is to keep our taxes low to make sure that we are in a position to respond to changes in the global economic environment and that Canada can maintain its position as one of the leaders in the world in terms of our overall economic performance."

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