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Recessions and deficits

There’s probably a wee bit of truth behind Justin Trudeau’s accusations.

But to suggest that Conservative fiscal policy played anything more than a minor role in driving Canada into a so-called recession is off-base.

First, let’s not call it a recession. It is, rather, two straight quarters of economic contraction, which meets the outdated loose definition of a recession, but in this case lacks the hallmarks of what we know a recession to be.

Second, whatever it was, it’s probably not any longer. Mr. Trudeau is making quite the leap in suggesting we’re still in it when early evidence suggests we’re not.

The Liberal leader, discussing the Conserative government’s $1.9-billion surplus for 2014-15, told a town hall gathering this week that the surprise rebound “was a political goal that actually has helped us slide into the recession that Canada is the only G7 country in right now.”

One could easily argue that the modest fiscal tightening certainly didn’t help, and in fact may have played a small role. Turning off the taps will do that.

One could also easily argue that the government could have, and should have, done more on several fronts. Trying to ease an unemployment rate that has now climbed back to an elevated 7 per cent is but one example.

And of course, the Bank of Canada itself saw fit to add stimulus, via two interest rate cuts so far this year.

And it’s not just Ottawa. Governments have been pulling back across the board.

Mr. Trudeau, caught up in the political heat of the moment, and pledging his own deficit-stimulus program in the election campaign, is overplaying it.

We don’t know what would have happened had the government turned on the taps amid the rout in crude, but it’s a safe bet that it wouldn’t have stopped the massive retrenchment in the oil patch.

As the Bank of Canada sees it, the collapse in resources was the “primary source” of the trouble in the first half of the year, and a faltering U.S. economy at that point was also to blame.

In its latest monetary policy report, the central bank pointed its finger at the 16-per-cent plunge in first-quarter business investment, which it described as the “main contributor” to the annualized 0.6-per-cent contraction in gross domestic product.

That retrenchment, it said, was “particularly pronounced in components that are heavily weighted toward the oil and gas sector.”

Remember, too, that the oil-dependent provinces of Alberta and Newfoundland and Labrador are believed to be in recession, with Saskatchewan on the margins, while several other provinces are showing no such signs.

I’d argue that the chart above goes a long way in telling the story, though there are winners and losers that don’t show up here. Note the red and the green lines, in particular.

Economists tell me it’s near impossible to say what economic growth might look like after stripping out the impact of the oil shock.

(And please note that bank economists generally don’t wade into politics. I put the question to some, but didn’t say why I was asking.)

Bank of Montreal chief economist Douglas Porter, for one, estimates that, absent the oil rout, the economy might have expanded at a pace somewhere between 1 per cent and 1.5 per cent.

Remember that Canada was also being hit by weaker car production amid a major plant retooling, a “terrible winter” in the East and the Western wildfires during that period, Mr. Porter noted.

The discussion here is about whether the Tories laid Canada low, not whether the government should be spending more, or running a surplus or a deficit.

Indeed, David Rosenberg, the chief economist at Gluskin Sheff + Associates, said yesterday he believes that Conservative fiscal policy is “unnecessarily tight” at this point, meaning the government could share the wealth.

“I mean, economic conditions were viewed so poor that the Bank of Canada opted to cut rates twice so far this year, but there have been scant offerings in terms of fiscal stimulus – stimulus that would have the dual impact of being immediately felt in the economy (and help to offset the sharp falloff in investment in the energy sector) as well as providing a boost to popular opinions for the incumbent government on the campaign trail,” he said in a report.

“And, again, what is the point of getting your fiscal books in order if not to allow the scope to provide countercyclical support to the economy in times of need?”

OECD takes dimmer view

The Organization for Economic Co-operation and Development is taking a dimmer view of Canada’s economy, cutting its growth forecasts for this year and next.

The OECD’s new projections for Canada bring them more into line with what observers are saying, and could well play a role in the country’s federal election campaign, handing more fodder to opposition parties that have been hammering the governing Conservatives on the economy.

In a fresh outlook today, the OECD trimmed its forecasts for Canadian economic growth to just 1.1 per cent this year, and 2.1 per cent for next year, down 0.4 of a percentage point for 2015 and 0.2 of a point for 2016..

But also key for Canada, the group raised its projection for 2015 growth in the United States, to 2.4 per cent. Next year’s U.S. outlook, though, was trimmed to 2.6 per cent, though the group did recommend the Federal Reserve hike its benchmark lending rate.

It's Miller time

Investors are braced for either a megadeal or a beer brawl among two of the big players in the brewing industry.

Anheuser-Busch InBev is poised to bid for SABMiller, the latter said in a statement today.

SABMiller said only that Anheuser-Busch has advised of a pending offer, but that it has no details as yet.

“The board of SABMiller will review and respond as apprpriate to any proposal which might be made,” it added.

A deal would put the combined market cap at about $250-billion, The Financial Times noted after SABMiller shares surged.

Auto deal struck

Fiat Chrysler has struck a tentative deal with the United Auto Workers that the union will take next to General Motors and Ford.

Details are scant, though Fiat Chrysler chief Sergio Marchionne said the company’s two-tier wage system “will go away over time,” Reuters reports.

The tentative deal affects about 40,000 workers in the U.S.

Factory sales up

Canadian manufacturers have scored another strong month, with sales up 1.7 per cent in July.

Today’s report from Statistics Canada follows June’s 1.5-per-cent gain.

Interesting, too, is that today’s results are largely because of higher volumes.

Driving the increase, the federal statistics agency said, were sales of autos and auto parts.

Stat of the day

6.2
Percentage gain in the 2015 national average home price, as forecast by the Canadian Real Estate Association.

Video: Has Canada's economy hit bottom?

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