New cabinet must make the best of an uncertain economic outlook: Don Pittis

According to those trying hard to understand what markets are telling us about the economy, “not as bad as feared” is the new global watchword.

While the best of the economic recovery following the 2008 collapse may be over, the most stirring part of the analysis, should you choose to accept it, is that the long-awaited recession has been postponed.  

As Canada’s new cabinet takes the reins this week, their job will be to make the best of what even the optimists foresee as an uninspiring global economy in the coming year.

The job of the new government and its economic ministers will be to use their weakened power as a minority to nudge the country away from crises. And despite a list of problems awaiting attention, including most immediately a rail strike that if left unresolved will soon begin to do long-term damage in numerous sectors, the country continues to have many, if poorly distributed, advantages.

But however Canada deals with its internal problems it must do so in the context of a global economy that continues to struggle.

Of course when scrying the economic future, everyone has a different crystal ball. Among those who sounded a less optimistic note at the end of last week was Laurence Boone, chief economist at the Organization for Economic Co-Operation and Development, often seen as the rich countries’ economic think-tank.

Time to be worried?

“The outlook for the global economy is worrying and policy-makers should be worried,” Boone, ominously, began her video presentation on the OECD’s latest outlook with the less-than-stirring title Weak trade and investment threaten long-term growth.

Like the Bank of Canada’s Stephen Poloz, Boone believes the disruption in global trade, caused at least partly by U.S. President Donald Trump’s attempt to get what he saw as a better deal, has done long-term damage. Repeated and continuing trade scares have meant businesses that would otherwise have borrowed at current bargain rates to invest have put off those decisions due to uncertainty.

Boone’s solution is a new round of fiscal spending by governments on things like “21st-century infrastucture,” partly to replace that private sector investment but intended also to reduce uncertainty enough so that businesses once again feel they can borrow to expand with confidence.

“We can escape long-term stagnation by combining social reforms with targeted spending and tax policies, at lower interest rates, and raise investment confidence,” said Boone in a call for concerted action by global governments. “But everyone must recognize that the time to turn the tide is now.”

A more optimistic outlook came in market analysis from the London Financial Times in an attempt to explain the recent surge in stocks, that included record highs for Canada’s main index, and an increase in short-term bond earnings quite different from the inverted yields so recently considered a recession warning flag.

The idea is that unlike concerns from people like Boone, and similar gloom from the IMF and World Bank, which are based on data that has already been collected, markets act as an indicator of future expectations as traders load up in anticipation of better returns ahead.

But even after assembling a collection of data, including a chart that shows a gentle upturn in the economic outlook for major world economies including Canada, their conclusions are less than enthusiastic.

“So far the evidence suggests the slide in the global economy is coming to an end, but the pace of recovery is still expected to be weak,” said the FT analysis.

The feeling is echoed in the deliberations released last week of the U.S. central bank in the run-up to its latest interest rate move where Fed chair Jerome Powell assured us this was his last cut for a while. Unless of course the economy weakens again, possibly due to a stalemate in the trade talks between the U.S. and China.

What’s around the corner

Such conditional parsing is always the way of economic forecasts. The ability of markets, or any forecaster, to tell us with reliability what is around the corner is far from certain.

In the meantime, the new cabinet is getting plenty of advice over how to squeeze the most out of an uncertain economy.

From Margaret McCuaig-Johnston at the Macdonald-Laurier Institute comes the advice that Canada must make it a priority to reset its own trade and political relationship with China, including making a concerted effort to diversify Canada’s Asian trade. From David Parkinson at the Globe and Mail, that reappointed finance minister Bill Morneau must overhaul the tax code.

Canada’s seemingly insatiable appetite for new housing continues to help drive the economy despite global weakness. (Don Pittis/CBC)

At a speech to the Ontario Securities Commission billed as a “fireside chat,” the Bank of Canada’s Poloz hinted at two aspirations for his political masters that may end up in conflict. One was a liberalization in Canadian interprovincial trade, and the other a new awareness of how climate change represents a risk to the financial system.

But while the government will have its work cut out for it in synthesizing its perceived election mandate to reduce carbon with the oil-producing regions’ insistence on increasing the export of carbon fuels, it will do so with a few ace cards in its hand.

One is the strong consumer economy both in the U.S. and here at home prompted by job and wage growth that has helped allow North American’s to live in a bubble of relative prosperity.

Last week the Canadian Federation of Independent Business revealed that despite a steady drip of immigration, more than 430,000 jobs have gone unfilled in the Canadian private sector. Statistics Canada provides its own jobs update Dec. 6.

A second is core inflation — the measure of price rises with volatile sectors removed — of more than two per cent that remains the envy of rich countries around the world, including the United States, meaning that Canada can reserve interest rate cuts for when the economy really needs them.

And finally, despite the social complications it creates, Canada has the advantage of a seemingly insatiable demand for housing that has led to a resurgent building boom that, so long as the economy continues to inch ahead, shows no sign of ending.

Follow Don on Twitter @don_pittis

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