Bank of Canada Downgrade Weakens Harper’s Election Trump Card

Prime Minister Stephen Harper won three consecutive elections by touting his stewardship of Canada’s resilient economy. The fourth time around, that option is slipping away.

With parties already in campaign mode for the Oct. 19 vote, the Bank of Canada this week slashed nearly a full percentage point off its 2015 growth forecast and now says the economy contracted in the first half of the year. Harper’s projected budget surplus, upon which he’s pinned much of his political fortune, has been thrown into question as Canada teeters toward recession.

While Governor Stephen Poloz avoided using the R-word Wednesday in cutting the central bank’s benchmark interest rate for a second time in six months, his sharply downgraded outlook is more bad news for the prime minister. Canada’s economy has already posted four straight months of negative growth and its trade deficit is setting records this year.

“They can forget about any idea of running on the strength of the economy,” said Frank Graves, president of polling firm Ekos Research.

Harper -- who is running second in a close three-way race - - blames Canada’s woes on the fragile world economy. His Conservative government cites its expanded child-benefit payments as a de facto stimulus program and maintains moribund output will rebound into positive growth this year.

The public doesn’t appear to share that confidence. A survey in May by Graves’s firm found 68 percent of respondents believed Canada was already in a recession and 73 percent thought their economic fortunes had worsened or gone unchanged since 2010, the year before Harper’s Conservatives won their first majority.

“Regardless of what anyone is calling it, the general outlook is we’re in a recession,” the pollster said.

‘Fair’ Critique

While poor economic news is a concern for the government it also poses challenges for the opposition, according to Tim Powers, a lobbyist with Summa Strategies in Ottawa and a former research director for the Progressive Conservatives. The PCs were one of two parties that merged in 2003 to form the united Conservative Party under Harper.

“The critique of the Conservatives is entirely fair,” Powers said. “But the ability of the opposition parties to deliver upon their own promises and in turn help or enable Canadians is also going to be in peril, because we’re all working with the same numbers.”

With Harper’s team warning of the “unnecessary risks” posed by the New Democratic and Liberal parties, Powers added: “I think the government sees opportunity in the comparisons that will be painted in the campaign about who would do what in these tough circumstances.”

The R-Word

As difficult as it is for incumbent governments to fight negative economic trends in an election, it could have been much worse, pollster Nik Nanos said. Any negative news from a neutral third party such as the Bank of Canada can be seen as a report card on the government, he said, pointing to Poloz’s careful choice of words this week.

“What the governor has not done is escalate concern about the economy by using the R-word,” said Nanos, chairman of Ottawa-based Nanos Research Group. “The reality is as soon as the governor of the Bank of Canada uses the word ’recession’ he’s basically created a clip for any opposition party.”

The central bank now projects the economy to grow by 1.1 percent this year after contracting “modestly” in the first six months. The government’s April budget was based on 2 percent growth in 2015, yet Finance Minister Joe Oliver said Wednesday the country remains on track to balance its books.

Consumer Spending

Poloz’s cut is aimed at spurring growth and Harper’s expanded payments to families with children -- announced late last year, with the first checks due to arrive this month -- will provide a “noticeable bump” in consumer spending, the central banker said at a press conference after his rate decision.

Guy Caron, a lawmaker with the front-running New Democratic Party, doesn’t think the child-benefit checks will have much economic impact and accused the Conservatives of sticking their head in the sand. “What the government has done so far to even acknowledge there was a considerable slowing down of the economy was basically nothing,” he said.

Scott Brison, finance critic for the third-place Liberals, said Harper’s “economic record is in tatters” and that Canada is the only Group of Seven country on track for a recession.

“Harper’s plan -- tax cuts for the rich and cuts to services -- is not working,” he said by phone Wednesday from Nova Scotia. “A technical recession is what we’re heading towards. The government can’t deny that.”

‘On Track’

Yet the Conservatives are steadfast in their view that Canada will bounce back. “We remain on track for a balanced budget in 2015,” Oliver spokeswoman Melissa Lantsman said in an e-mail Wednesday. “Furthermore, we budgeted additional room to account for the continuing weakness in the global economy.”

Craig Wright, chief economist for RBC Capital Markets, takes the government at its word. “I still think if their target is to balance the budget, they’ll manage to do it,” he said by phone from Toronto, adding that any budgetary impact of lower GDP growth will be offset by lower interest rates.

According to Lorne Bozinoff, president of Toronto-based polling firm Forum Research, it’s the unemployment rate -- not deficit fears or GDP projections -- that the public reacts to most in campaigns.

That economic indicator now stands at 6.8 percent, down from as high as 8.7 percent in 2009. Statistics Canada will update it three times before election day and what direction it takes will help decide the campaign, Bozinoff said.

If those numbers “start to show deterioration, the argument will be ’Look, these guys aren’t even good at their key strength, which is economics,’” the pollster said. “It’s absolutely critical for them to continue to have the high ground on the economy. If they lose that, they have no bullets left in their gun.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE