Canada is more vulnerable to a global slowdown than it was in 2009, when it emerged from a recession before other Group of Seven countries, because the levers policy makers pulled then would be less effective now, say economists at two of Canada’s largest banks.
Renewed government stimulus and lower interest rates won’t provide the same boost they did during the last slump, when spending on housing and infrastructure helped cushion the blow, said Robert Kavcic, a Bank of Montreal economist in Toronto.
“There aren’t a lot of supports to Canadian economic growth right now,” Kavcic said. Even if new stimulus was offered, “you wouldn’t get the same burst out of the housing market now as you did in 2009,” he said.
Canada’s stock market and yields on government Treasury bills have declined this month on concern that Europe’s debt crisis may persist and the U.S. may not avoid the so-called fiscal cliff -- $607 billion of spending cuts and tax increases due next year unless Congress acts -- crimping exports. The prospect of renewed global weakness comes as Canada reports inflation near the bottom of the central bank’s target band for a third month, and with growth forecast to stay below a 2 percent annual rate for a third quarter.
Exports, such as crude from Calgary-based Suncor Energy Inc. and flight simulators from Montreal-based CAE Inc., account for one-third of Canada’s economy. While Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have said they have options if another global shock hits the world’s 11th largest economy, “it’s definitely a challenge for the government to identify areas that could benefit” from stimulus measures, said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit.
“Pent-up demand has largely been released so it’s harder for Canada this time to outperform,” Tulk said.
Canada’s Conference Board also said today that its consumer confidence index declined for a second month in November, to 80.3 from 81.1, reflecting more negative responses about the current economy.
Canada’s banking system, ranked world’s soundest by the World Economic Forum for five straight years, has continued to lend, boosting the country’s housing market to records. Consumers have taken advantage of low interest rates to increase their debt as a share of income to levels greater than those in the U.S. before a slump in the housing market brought on its last recession.
In response, Flaherty has acted four times to make mortgage lending rules more restrictive, and he and Carney have warned that that debt-fueled big-ticket spending is the biggest domestic economic risk, suggesting policy makers would be reluctant to try to boost that part of the economy again.
Similarly, the government has been working to eliminate its budget shortfall after recording a record deficit in 2009. Flaherty said in a speech yesterday his goal is restoring fiscal balance before the next federal election, expected in 2015, by controlling spending.
“Faced with a crisis in 2008-09, we responded quickly and effectively,” said Flaherty spokeswoman Kathleen Perchaluk, in an e-mail. “If we are faced with another crisis, we are prepared to act again.”
With consumers indebted and governments retrenching, policy makers are relying on business investment to drive economic growth. Canada has already cut the federal corporate tax rate to 15 percent from 19 percent in 2009 and could offer temporary incentives such as higher depreciation rates or investment credits to boost investment, said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s Capital Markets unit in Toronto.
While Carney has said companies should use “dead money” on their balance sheets to spend on boosting productivity, companies remain reluctant to expand. Investment intentions fell to a three-year low in a quarterly central bank survey published Oct. 15 that also showed firms expect sales growth to stagnate over the next 12 months.
CAE Chief Executive Officer Marc Parent said reduced military spending from indebted European countries has blunted profits. New orders have been “dropping off faster than we expected,” Parent said on a Nov. 8 earnings call.
Bombardier Inc. delayed a $1 billion bond sale last week after the Montreal-based commercial-aircraft maker’s credit rating was lowered by Standard & Poor’s on lower-than-expected cash generation.
Statistics Canada said today that consumer prices advanced 1.2 percent in October from a year earlier, matching the pace of the prior two months. The Bank of Canada sets interest rates to keep inflation in the middle of a 1 percent to 3 percent band, and forecasts inflation will remain below 2 percent until the end of next year.
The central bank has kept its key lending rate at 1 percent for more than two years, the longest pause since the 1950s. Spokesman Jeremy Harrison declined to comment today on the effectiveness of new stimulus.
Elsewhere, South Korean consumers faced with falling home prices and record household debt are cutting spending, dragging on demand just as export growth is restrained by gains in the won. Borrowing and credit purchases rose to a record 937.5 trillion won ($864 billion) in the third quarter, the Bank of Korea said yesterday.
In Europe, German business confidence unexpectedly rose from the lowest in 2 1/2 years in November, signaling Europe’s largest economy may regain some strength. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 101.4 from 100 in October, the first gain in eight months.