Today's economy

Ottawa’s focus on economic growth makes sense

By Kevin Press,

Comments (2)

The weak economic recovery that followed the 2008 financial crisis, complete with double-dip recessions in the eurozone, constitutes a “new norm” for the global economy. That’s the on-the-record opinion of Prime Minister Stephen Harper. He told the Sun News Network last week that his government will place a higher priority on protecting the Canadian recovery than it will on deficit reduction.

Image of an industrial machine's interface.The Prime Minister has it right. There is ample reason to believe we are just four or so years into a long cycle that could see slow economic growth or worse for the remainder of this decade. As consumers unwind record high debt levels here and abroad (it’s bound to happen in Canada, eventually), it’s unwise to count on the kind of strong recovery that typically follows a more conventional downturn.

The latest numbers to back up that cautious view came Friday. Statistics Canada’s Monthly Survey of Manufacturing found that sales dropped 1.5% in July, relative to June. It’s the third negative result in the last five months.

“This is another piece in the puzzle,” said Francis Fong, an economist at TD Economics. He and I spoke Friday afternoon. “Economic growth is slowing, and it’s not just Canada … We’re talking about a slowdown in economic growth all across the globe.”

Of the 21 industries measured, 11 saw their sales fall. That list makes up about 60% of Canada’s manufacturing base.

The most dramatic declines (in dollar terms) came in Ontario and Quebec. Sales were off 1.9% in Ontario (to $22.3 billion) and 2.6% in Quebec (to $11.3 billion).

Other provinces and territories also saw a drop. Manufacturing sales fell 12.6% in Nova Scotia, 7.1% in Yukon, 6.7% in Prince Edward Island and 5.1% in Newfoundland and Labrador.

Inventories are up too, which doesn’t bode well for a turnaround in the short term. Nationally, inventory levels rose 1% to $65.5 billion.

Graph - Statistics Canada monthly survey of manufacturing, July 2012.

Are these relatively weak 2012 manufacturing numbers cause for concern about another recession here in Canada? Fong said no. “This is quite typical of these sorts of economic cycles,” he told me. “So many of our manufacturers are export-oriented. And growth is pretty slow among the majority of our trading partners.”

Fong also noted that manufacturing sales have been pretty strong since mid-2011. “If you look at it in totality, the manufacturing sector has improved by leaps and bounds,” he said. “It is still a long way from its pre-recession level. But it is recovering.”

“This global slowdown in growth will not last forever,” Fong said. “A lot of it is being driven by economic uncertainty coming from Europe. It is driven by things that the Chinese government did to try and slow inflation, and thus slowed economic growth there. They’re expected to boost growth in the near term. We’re expecting that Europe is eventually going to work through its financial crisis. It’ll be a bumpy ride, but they’ll eventually work through it. That in turn should help boost the Canadian economy and our export sector down the road.”

Given that outlook, Ottawa’s primary focus on economic growth makes sense. It’s not a guarantee that the Bank of Canada will keep its overnight rate low, but neither is it a signal that rates will rise significantly anytime soon.

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David on

I find it interesting that this article mentions that consumers are trying to ‘unwind record high debt levels here and abroad.’ Yes, the government has set low interest rates to encourage spending, but with consumers taking on more debt, there is a concern that they will be unable to pay the loans back when rates begin to rise again. I can see consumers taking on some debt, but in general they seem to be taking on more than they can handle (as high as 150% of income from some reports I have read).

I think a bigger concern is that these people risk defaulting on their loans because they are taking on too much debt. That’s why the federal government changed the mortgage lending rules (i.e., reducing amortization periods), so that consumers can control their spending. Hopefully these changes will allow for a more controlled recovery, and consumers in general will be able to control their spending as interest rates eventually rise. I realize this is only a small portion of the recovery, but it is quite significant.

    kevinpress on

    Thanks David. I think you’re hitting on one of the most important aspects of this. I wouldn’t argue that we’ll see a dramatic change in consumer spending, or even that debt levels relative to disposable income won’t continue to rise while rates remain low. But I do think it’s prudent to anticipate some degree of slowdown in consumer spending.

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