Canada's economic recovery could falter if other countries can't join the party
Vancouver Sun – June 11, 2010
Editorial

A quick glance at the numbers shows the Canadian economy on the mend from a short, shallow recession that, for most, was a minor setback to business as usual. Economic growth in the first quarter was a respectable 1.5 per cent. On an annualized basis, Statistics Canada says, that translates to growth of gross national product of 6.1 per cent -a fiction perhaps, but illustrative of a robust recovery underway.

Even better, this recovery is creating jobs. In May, the economy churned out nearly 25,000 jobs, after delivering a record 108,700 jobs in April, bringing the total since the trend turned in July 2009 to 310,000. What's more, these were full-time jobs, mainly in the private sector, which saw employment growth of 2.8 per cent since last July, compared to 2.2 per cent in the public sector.

The vigour of the Canadian economy persuaded the Bank of Canada that it could slip through a quarter-point increase in interest rates without stifling the recovery.

Canada, the pundits tell us, will lead the global recovery. But where is the rest of the world? Rather than following, the eurozone is mired in a sovereign debt crisis and many in the United States, which has a US$13-trillion debt burden of its own, are worried about a double-dip recession.

A double-dip recession is a rare animal. The last one occurred when then-Federal Reserve chairman Paul Volcker raised interest rates and tightened the money supply to fight inflation following a brief recession in 1980, cutting a fledgling recovery short and plunging the U.S. into its deepest recession since the Great Depression, which was the previous double-dip downturn.

Predictions of a double-dip recession seem far-fetched. After all, the situation is strikingly different from two decades ago. Interest rates are at record lows, there is no inflation and the government quickly responded with massive monetary stimulus.

But economic numbers continue to disappoint. U.S. job data showed 411,000 people were added to payrolls in May, well below expectations, and of that just 41,000 were in the private sector. Most of the jobs were temporary hires to conduct the U.S. Census.

At the same time, small banks are failing, foreclosures are continuing, incomes are stagnant and retail sales are tepid.

Meanwhile, governments in Spain, Portugal and Greece are warning their citizens to brace themselves for service cuts, reductions in social benefits and higher taxes to deal with their public debt. About $2.6 trillion of this debt is held by foreign financial institutions in France, Germany, Britain, the Netherlands, Italy, Belgium and the United States. It is not clear which institutions are vulnerable, creating the kind of uncertainty that created the recent credit crisis spawned by subprime mortgage derivatives.

Against this backdrop, all organizations, public and private, must cope with the enormous cost of environmental measures, including cap-and-trade regimes and/or carbon taxes, which cannot yet be calculated, while financial institutions may face not only higher costs but aggressively interventionist regulation emerging from Basel III, an international accord that governs everything from capital requirements to liquidity ratios. But the details are unknown. Uncertainty is anathema to investment, and without investment economic growth is unsustainable.

Rather than leading the global recovery, Canada may well be dragged down by the economic malaise of its trading partners and the cloud of uncertainty spreading gloom on financial markets.

One telling statistic shows Canadian industry operating at just 71 per cent of capacity.

Domestic demand alone won't drive the Canadian economy at full throttle. Exports still account for about a third of GDP.

Unless the rest of the world can resolve some of its serious economic issues, Canada's recovery could be short-lived.