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Stalled economy puts policy makers on hot seat Add to ...

Jim Flaherty and Mark Carney had a pretty good plan to survive the Great Recession: Pump billions of dollars of stimulus cash into the economy and drive interest rates to near zero. What they didn't bank on was that two years later businesses and consumers would still be limping along, unable to pick up the baton.

As Ottawa and the Bank of Canada begin dialling back all their Keynesian spending, the economy is stalling. Businesses are reluctant to hire and invest - at least at home - and consumers are strapped and stressed. The high Canadian dollar is pricing exports out of key foreign markets, Canada's biggest customer is in even worse shape than we are and households are carrying worryingly high debt loads.

Lower expectations

The private sector's failure to get off the mat is causing economists to scale back their forecasts for the rest of the year and beyond. Many now expect growth of less than 2 per cent in the second half of 2010 and about the same in 2011, putting pressure on government budgets that were based on expectations of much higher growth.

An extended rough patch could also keep Canada's unemployment rate above 8 per cent through 2011 and 2012, crowding vulnerable older workers and youth out of the workplace, said Andrew Jackson, chief economist at the Canadian Labour Congress. (Canada's jobless rate was 8.1 per cent in August.)

The economy must grow at roughly 2 per cent a year just to keep the existing work force employed.

"The assumption was that the private sector would take up the slack, but that's obviously not happening," Mr. Jackson said.

First-hand view

Typical of the growing malaise in Corporate Canada is Johan van't Hof, whose Toronto-based Tonbridge Power Inc. builds transmission lines linking renewable energy producers - wind, solar and hydro - to main grids. He's finishing work on a major line connecting Alberta to Montana, but future prospects look a lot murkier because demand for electricity is still way down.

"I'm two or three links in the chain removed from the consumers, so if the consumer and the electricity demand isn't there, the new generators don't go in … the wind farms don't go in, in which case we don't build lines," explained Mr. van't Hof. "We're at the end of a very long tail."

When Canadian companies do invest and grow these days, they're increasingly doing it somewhere else, lamented Jayson Myers, president and chief executive officer of Canadian Manufacturers & Exporters. He said companies are taking advantage of the strong loonie to scoop up cheap foreign assets, but it's not doing Canada much good.

"Companies are investing, but they're investing outside Canada," he said. "We're not getting the full impact of that business investment here."

That's the case for Brad Miller, president of Chilliwack, B.C.-based industrial equipment maker IMW Industries Ltd., which is shifting some operations overseas to deal with the high dollar, anemic U.S. demand and fading infrastructure spending.

"There was some artificial demand, which was great," said Mr. Miller, whose company makes natural gas compressors and dispensers. "The idea was to keep things moving until the economy picked up its own momentum, but I don't think that's happening yet."

In fact, on Wednesday, Statistics Canada reported that Canada's gross domestic product shrank by 0.1 per cent in July - the first monthly drop in nearly a year.

Search for solutions

The unexpected slowdown has left official Canadian forecasts wildly off-base. The Harper government's most recent budget, for example, assumed after-inflation growth of 3.2 per cent in 2011. The Bank of Canada's latest forecast is for GDP growth of 2.8 per cent in the July to September period - a target that most experts said is unattainable.

"The Canadian economy is performing much worse than Carney & Co. had expected," Bank of Montreal economist Michael Gregory said in a note to clients.

The question now is what Ottawa, or anyone else, can do to keep the recovery going - and prevent a backslide into recession.

A lower dollar would help. But that appears unlikely in the short term.

The CLC's Mr. Jackson believes the solution is to think big and think long term. He said Ottawa should be pushing more ambitious infrastructure investments, such as public transportation, high-speed rail and green energy projects that would spur private investment.

The government's existing infrastructure projects are heavily skewed to generally small, local projects, such as roads, sewers and parks.

Larger projects would benefit companies such as his, Mr. Van't Hof said, but he pointed out that the kinds of large power developments Tonbridge thrives on require a stable economy and confident consumers - just the opposite of the "lingering malaise" that prevails now.

"You need to have sustained investment and a sustained economy for a big capital investment like we do to take off," he said.

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