The Liberal government’s case for further spending may get a lift if fourth quarter GDP comes in worse than expected on Tuesday.
Canada still lagging behind U.S. growth, and at this time, we’re nowhere near to catching up
Divergence in North American economies shows little manifestation of narrowing. As the U.S. economy performed much better than expected in the final quarter of 2015, Canada’s output likely slowed due to the ongoing drag from low oil prices and weak business investment.
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It appears that GDP rose by a paltry 0.3 per cent for 2015 in general, which would mark the weakest 12-month gain since the final quarter of 2009.
“The problem is whether the economy slightly expanded or contracted within the final quarter of this past year,” said Derek Holt, an economist at Scotiabank, inside a note. “Q4 GDP could increase pressure on Ottawa to include stimulus on March 22nd once the Federal budget lands.”
Despite the slowdown, Pm Justin Trudeau’s campaign promise to inject the Canadian economy with fiscal stimulus has gotten plenty of criticism, in large part because the projected budget deficit has ballooned to $18.4 billion for next fiscal year (starting April 1).
The higher deficits outlined in Finance Minister Bill Morneau’s recent fiscal update don’t include most of the Liberal’s election promises, for example infrastructure spending, therefore the final projection is likely to come closer to the $25 billion to $30 billion range.
Holt noted much of the economy’s deterioration occurred at the end of the 3rd quarter, in September, therefore it entered Q4 in a weak starting place.
“That was the only monthly contraction out of the past six months, however it automatically place the Canadian economy behind the eight ball into Q4,” he noted.
That’s why much of the focus is going to be on how Q4 ended, and December GDP figures (also out Tuesday) will provide some answers.
The finance department is more conservative than the others, projecting nominal GDP development of only 0.4 percent in 2016, compared to an average of 2.4 per cent among private forecasters.
RBC comes in near the cheap, estimating average annual development in nominal GDP of a single percent for 2015 and 2016. That might be the weakest two-year performance outside the 2008 financial crisis.
The bank also noted the actual stimulus from new programs may be roughly 0.5 percent of GDP.
If Q4 growth measures zero as anticipated, that will mean the Canadian economy didn’t grow in three of the past four quarters.
While many don’t like the idea of big deficits, those that offer the Liberal plan include David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.
“I would recommend reviving economic growth with fiscal policy at a time once the energy sector is detonating and there’s heightened uncertainty,” he wrote in a note. “Perhaps understand that the problems (oops, I meant challenges) that Canada confronts will find little when it comes to remedy from monetary policy – the country hardly is affected with high rates of interest or an uncompetitive exchange rate.”
National Bank Financial recommended that the Liberal government fully implement its election spending platform, whilst developing a $20 billion special trust to invest in targeted projects which will make the greatest chance of growth.
With Canada’s current debt-to-GDP ratio of 31 per cent, National Bank Financial’s chief economist and strategist, Stfane Marion, believes ?the federal government has wide latitude to use these fiscal tools – “a far more potent policy instrument in the present circumstances – to support growth and ease the reorientation of the Canadian economy toward non-resource sectors.”
On budget day, Canadians will become familiar with the extent to which the federal government shares this view.
Financial Post
jratner@nationalpost.com
