The Bank of Canada and the Harper government are pulling in opposite directions. The casualty is the Canadian economy.
Ottawa is tightening fiscal policy despite the economy being weak; the central bank is dropping interest rates because the economy is weak.
Neither the bank nor the government wants a weak economy. The Harperites have entered an election campaign with a sputtering economy mocking their claims of excellent economic performance. The bank lowered interest rates in January, driving down the value of the Canadian dollar, hoping for export-led growth. But quicker growth didn’t happen; in fact, the economy got weaker. So, the bank has doubled down on the low-dollar, export-led growth strategy, lowering interest rates again last week.
If federal fiscal policy were more expansionary – that is, if Ottawa were running a modest deficit – the bank might have held off these interest rate decisions. Instead, the bank, and the bank alone, is trying to get the economy out of the hospital while Dr. Harper and his aides are busy saying the patient needs more budget-balancing medicine. The family allowance cheques – a.k.a. Universal Child Care Benefits – arriving in this week’s mail do not constitute economic stimulus.
The Canadian economy, replete with discouraging trade and current account deficits, was supposed to climb aboard the engine of the U.S. economy. Instead, U.S. growth has been disappointing – faster than Canada’s to be sure, but less than anticipated.
Low interest rates and sagging dollar: We’ve seen this combination before, and it did nothing for Canadian competitiveness. It made exports easier for some industries, but not because they became more productive. They locked themselves into depending on a low-valued currency. The risk is that history will repeat itself.
Ever-lower interest rates will likely inflate further the housing markets in Toronto and Vancouver, which are already out of sight for many would-be buyers. Strangely, these housing markets, which show all the signs of a bubble waiting to deflate (remember the Tokyo real estate collapse), are the strong spots of a wobbly economy weakened, in part, by the collapse of the world price of oil and other commodities.
These prices are not likely to recover any time soon, given world supply-and-demand, which means a sustained struggle for the Canadian economy. To this must be added factors no politician likes to address, including the long-term drag on economic growth from an aging population.
