OTTAWA – Canada is emerging in front of the pack as an increasing number of economic bodies around the world are contacting governments to ramp up public spending amid stubbornly weak global economic growth.
OECD sharply downgrades Canadian growth, requires urgent action on world economy
The Organization for Economic Co-operation and Development said inside a report Thursday that more public investment is required in advanced economies as it becomes clear that monetary policy alone did not stoke growth. Many central banks have brought their interest rates right down to zero as well as attempted to buy long-term bonds inside a bid to invigorate their economies.
Those efforts alone now appear set to fail, the OECD said as it downgraded its 2016 global growth outlook by 0.3 points to three percent, matching last year’s underwhelming rate of growth. Canada received among the sharpest downgrades among developed countries, with growth predicted to average only 1.4 percent this year, compared with a forecast of two percent made in November.
But economists noted that even as Canadian growth lags this year, the nation has emerged ahead of the curve as debt levels and the current budget allow it lots of space to maneuver around the fiscal front in the manner the OECD recommends.
“Canada stands out as one of few countries that really has got the fiscal leeway to invest more,” said Emanuella Enenajor, The united states Economist at Bank of the usa Merrill Lynch. “Our net debt-to-GDP, if you combine federal, local and provincial, looks very low compared to our developed economy peers. So it makes sense that Canada is leading the charge about this.”
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Canada’s Liberal government was swept into power on a platform that included spending a big amount on infrastructure to inflate the economy, which was originally proposed as part of a $10 billion deficit in the first fiscal year. That deficit is now likely to be considerably larger once the budget is unveiled, likely late next month. Prime Minister Justin Trudeau has already announced fast-tracked stimulus of $700 million for Alberta and the other $300 million for Saskatchewan.
Avery Shenfeld, chief economist at CIBC World Markets, asserted the federal government could work having a $30- to $40-billion budget deficit and never risk its goal of reducing the debt-to-GDP ratio by the end of the Liberal mandate. Even a $40 billion deficit, which may be the largest since the Harper government’s a lot more than $50 billion deficit throughout the Great Recession years, would spend time at roughly two per cent of Canada’s GDP.
“We have room to maneuver within the other way in the federal level, given the progress we made in earlier decades in lowering net debt-to-GDP,” Shenfeld said in an interview.
The economist notes that even ramping up the deficit to $40 billion could leave it in a ratio below the current 2.5 percent deficit the U.S. government is running (its lowest deficit in seven years).
The OECD, which includes 34 primarily high-income countries, joins an increasing list of voices that now argue monetary policy alone is not enough to stoke the world’s economy. It cautioned Thursday that continuing to rely solely on monetary policy risks developing a “low-growth equilibrium” where weak demand, low investment and low inflation linger.
At the moment, many of the world’s advanced economies, like the U.S. and people within the eurozone, have avoided relying on fiscal tools to kickstart their economies. Some countries confronted with large budget deficits, for example Japan, are cutting back on spending entirely. That makes Canada mostly of the countries in the developed world that’s actively likely to undertake a large fiscal spending program to reignite its struggling economy.
But Enenajor of BofAML stressed that government spending should only be viewed like a stop-gap solution. The idea is the fact that spending now will help buy more time for businesses to ramp up investment and hiring, which will ultimately function as the answer to sustainable economic growth.
“It’s important to highlight that the private sector needs to be there,” she said. “We call for a handoff, and when we don’t, then we’re going to have issues because we will be stuck on the government spending IV-drip.”
The federal government is facing pressure to not stray too much from its election promises, however. Finance Minister Bill Morneau said the 2009 week that balancing the household budget in Canada has become a “long-term” goal, prompting criticism from Conservative MP and finance critic Lisa Raitt that deficit spending could run away in the country.
Still, economists observe that the truth that Canada is deploying such spending and debating how much, instead of whether or not to spend, puts it ahead of other advanced economies right now.
“Canada is really hearing economists in a manner that politicians in other countries aren’t,” said Shenfeld.
