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(FREDERIC J. BROWN/Frederic J. Brown/Getty Images)
(FREDERIC J. BROWN/Frederic J. Brown/Getty Images)

Analysis: December, 2009

After the carnage, some muted optimism Add to ...

During Paul Martin's ill-fated bid for the Liberal leadership in 1990, his father used to call the campaign office regularly and ask the only really relevant question: "Is it getting worse?"

Every quarter throughout this recession we have been asking Canadian business leaders if it is getting worse, and they have finally said no. After the carnage the recession has wreaked on Canadian businesses and households, this is cause for relief, if not celebration. However, as was implicit in Paul Martin Sr.'s question, the end of the decline is really as far as expectations go at this time.

There is virtual unanimity that the recovery will be a slow one. Nine out of 10 believe the economy will grow in 2010, yet only 2 per cent are willing to predict strong economic growth. Executives told us that some sectors are poised to be winners, but nothing they have seen in the past three months has persuaded them that weak growth will become strong growth for the economy over all.

Rather than roaring out of the recession and into recovery, most believe that over the next two years, the economy will grow at a rate below the average of the past decade.

This minimalist approach to optimism perhaps explains executives' support for the Canadian government's fiscal policy and deficits.

In our March, 2008, C-Suite survey, just over half of executives said it would not be helpful for the federal government to "allow" a deficit to maintain stimulus and spending in the economy.

Now, almost two years on, a majority supports the Harper government running deficits until 2013, and says the $30-billion stimulus package put forth in the last budget was just right.

They do not want deficit elimination to be the No. 1 priority for the government. Rather, they think it should be one of the government's priorities. Canadian governments from 1975 to 1995 demonstrated that when balancing the budget is "one of your priorities," it is not going to happen. Executives are so fiscally dovish at this time that they don't even want a balanced budget to be the key goal for the government, preferring a more modest objective of a reduced deficit or a declining debt-to-GDP ratio.

What was a surprise in this survey is that Ontario executives were far more anxious than Western executives about the state of the federal government's finances. They were less supportive of the government's timetable for returning to surplus because they are more inclined to see the existing federal deficit as structural.

This may in part be driven by Ontario businesses' exceedingly negative view of the provincial fiscal situation. Very few Ontario business leaders have any confidence that their provincial government will be able to balance its budget, while western executives are much more likely to think that provincial fiscal problems are manageable.

It is clear that Canadian business feels the economic recovery is too fragile to have the public sector pulling money out of the economy. This is reflected in their ambivalence about whether consumers will make the retail sector a winner or a loser this year. Our consumer research indicates that caution is well founded. The middle class is in no financial position to drive the economic recovery.

Many think that spending will have to be cut and maybe the GST increased at some point, but not now. And executives would rather let the deficit go where it may than increase personal or corporate taxes at this point.

And so executives learned to stop worrying and love the deficit.

David Herle is a principal at the Gandalf Group

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