OTTAWA – Writing a federal finances are one thing, selling it can be a significant different matter.
Bill Morneau sets Canada on path for near-record deficits, growing to a lot more than $29B over next fiscal year
The Trudeau government has confirmed what so many private-sector analysts have predicted for months: Canada is going to a string of near-record deficits as it plows many billions of dollars into new programs – most of them promised, a few not – together with multi-year infrastructure projects that have not yet been decided.
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In fact, almost from the moment the document landed at the disposal of analysts, some were already hesitant to buy into it – most critically, they question the long-term forecasts for that economy.
Over the next five years, the Liberal government is calculating a gradual easing in the fiscal debt outlook, paving the way for a gradual return to balanced budget – or perhaps increasing surplus.
But if economic history informs us anything, it’s that another recession could be lurking nearby.
“Usually the U.S. economy adopts a downturn about a year or two years following the Fed begins tightening aggressively,” said Douglas Porter, chief economist at BMO Capital Markets.
So, while Finance Minister Bill Morneau is rolling out his just-released 2016 budget like a blueprint for growing Canada’s economy, others are warning that the years to come will still be challenging. The root of this concern lies mainly with the health of our mammoth trading partner towards the south.
Economists at JPMorgan Chase & Co. in New York are warning there is a 50-per-cent chance of a U.S. recession within the next two years – a concern that may be supported on Friday once the U.S. releases its latest gdp data.
“With wages picking up but productivity growing in slow motion, margins will probably continue their declines, which have historically signaled an expansion near its end,” JPMorgan economist Jesse Edgerton said a study note.
Given Canada’s reliance from the U.S., that may indicate trouble in this country, too.
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“With respect to our budget, we’ve clearly identified the need to make investments to enhance our economy,” Morneau told reporters Wednesday, carrying out a breakfast speech to business leaders in Ottawa.
“We’ve also attempted to give Canadians a transparent understanding of the growth that people think may come from those investments,” he explained. “We’re being very prudent in our investments … and with the appropriate investments we are able to come with an improved situation tomorrow.”
Morneau’s budget drew a red line under the previous Conservative government’s annual spending documents, which had gradually seen a $55-billion-plus shortfall created throughout the 2008-09 recession whittled right down to a break-even level.
On Tuesday, the Liberals set a training course from now until fiscal 2020 for any new string of deficits, starting with a $5.4-billion hole in fiscal 2015-16 that will be widened to more than $29 billion in the fiscal year beginning April 1, prior to being trimmed to around $14 billion in 2020-21.
It’s uncommon for that U.S. economy to visit a decade with no recession.
“Our goal is to get to some balanced budget over, approximately, a five-year time period – recognizing our priority at this time is to make those investments,” Morneau said. “In a scenario of slow growth, which is where we’ve been during the last decade, in a situation where demographics are challenging, in a situation where rates of interest would be the lowest they’ve have you been and we have the capacity to make investments because our debt-to-GDP may be the lowest within the G7 – this is actually the right time to create investments to grow the economy.”
The last decade, of course, has included an economic crisis and global recession, and was accompanied by Canada’s slow and meagre climb back to growth, using the U.S. – this country’s biggest export market – assisting to pull us along.
Now, the threat of some other downturn is raising its head.
“It might not happen this year, it might not even happen next year. But, let’s imagine, (the U.S. Fed) starts aggressively raising rates in late 2017, you may be looking at an economic downturn some where around 2019, 2020,” Porter said. “It’s uncommon for that U.S. economy to go ten years without a recession. It might be in the end of this timeframe, but I think it is extremely likely that over this five-year period we will undergo a downturn within the U.S. economy – which will affect Canada.”
Craig Wright, chief economist at RBC Economics, said “talk of the recession now’s a little worrisome, but they do happen.”
“It’s definitely possible and the likelihood of it boost the longer the (U.S.) expansion is,” he explained. “If it is a true recession, the (Canadian) fiscal numbers are the window.”
Financial Post
gisfeld@nationalpost.com
Twitter.com/gisfeld
