As Canadians are becoming all too aware, the spectre of a recession, no matter the definition, looms large during an election campaign. Despite such prominence, the recent debate made it abundantly clear that none of the candidates understands why the economy stopped growing in the first half of the year and they have even less of an idea of how to foster future growth.
Liberal Leader Justin Trudeau's opponents may call his Keynesian plans to run $10-billion deficits for the next few years reckless, but how much difference can they really make to an economy now pushing two trillion dollars? It's an amount that's neither large enough to stimulate economic growth, nor does it add a worrisomely meaningful addition to the national debt. Conservative Leader Stephen Harper's plan to run a balanced budget carries the trappings of prudence, but it does little to either recognize or rectify the issues behind the country's stalled economy. The NDP's Thomas Mulcair, meanwhile, is pledging to raise corporate taxes in a bid to finance increases to program spending. That's laudable from a distributional standpoint, but without a stronger economy where will the profits come from to provide the tax revenue he's seeking?
The roots of Canada's economic problems (and thus any solutions) won't be found in infrastructure spending, fiscal management or corporate taxes. Instead, the next government will have to contemplate what to do about a huge misallocation of capital that's arguably unprecedented in the country's history. Canada has put far too many of its eggs in the wrong basket – gambling on the massive development of a high-cost oil resource the rest of the world doesn't need or want. Not long ago considered by the Harper government to be the engine of economic growth, oil sands production is no longer commercially viable in today's glutted oil market. Tomorrow's emissions constraints will make that even more true.
Oil sands operators have already shelved billions in planned investment. Indeed, the oil sector's rapid implosion in spending is the principle cause of the oil-inspired downturn that's caused the much-discussed economic contraction we've seen so far this year. And that doesn't even take into consideration the future of the two million barrels a day of oil sands production that currently exists. The billions spent on that output is already gone and the jobs that depend on it may follow shortly.
The oil sands have become an enormous sinkhole for the Canadian economy. Whether the country's politicians understand how big is debatable. Alternately, they may also just be choosing to stick their heads in the sand and hope everything works out for the best. Either way it doesn't matter, Canada's economy will march on regardless. Fortunately, it will have at least one key ally working in its favour – the time-tested financial principle of mean reversion, which posits that deviations from the norm in one direction will inevitably give way to equally powerful movements in the other.
As Canada's petro economy unwinds from nearly a decade of oil-created distortions, the pendulum is already swinging the other way. A downsizing of the country's energy sector is unfolding, which means the oil-linked loonie is also seeing its wings get clipped. That may not be good news for retired snowbirds trekking to Florida or Arizona, but it is a welcome sight for a host of other industries that have struggled in the shadow of the country's oil boom. From manufacturing to tourism to film production, a weaker Canadian dollar will nurture economic growth in neglected parts of the economy. As activity shifts away from the oil-producing provinces and back towards manufacturing-based economies, Ontario in particular will see a renaissance. After watching its share of Canada's GDP shrink to a three-decade low not long ago, the province is now poised to start leading the country in growth.
It's a reversal of fortune that's already showing up in a broad array of fiscal and economic indicators from housing prices to provincial budget balances. Alberta, which until recently was accustomed to enjoying a string of multibillion dollar surpluses, is now facing a $6.5-billion deficit. In contrast, Ontario and Quebec, which saw deficits balloon, will see the clouds part and the sun begin to shine on their economies with a warmth that hasn't been felt in years.
Whether the country's shifting economic fortunes will end up being the deciding factor in next month's election remains to be seen. Regardless of the outcome, however, it's certain that the party forming the next government will end up presiding over a very different Canadian economy than the one the Harper regime spent the last decade trying to mould.
Jeff Rubin is the former chief economist of CIBC World Markets and the author of the number one best sellers Why Your World Is About To Get A Whole Lot Smaller and The End of Growth. His latest book is The Carbon Bubble.