Is the Canadian economy unraveling?

Will 2015 be the year the Canadian economy recovers, or unravels completely?

The stakes are high for Prime Minister Stephen Harper in this election year — it’s sink or swim.

While Harper must have an election this year, to win he needs to put all his best economic cards forward. The problem, however, is that there just does not seem to be any good economic news left.

Here is a breakdown of the overall Canadian economy.

Economic growth

In 2014, the Canadian economy had a lacklustre year. And now, we learn that real GDP declined by 0.2 per cent in November, mainly as a result of a weak manufacturing sector. This is the economy’s worst performance in almost a year. 

Our economy is slowly sliding in the wrong direction.

The Bank of Canada already admits growth will be lower in 2015, but how much lower? There are ominous signs that it will be much lower than the 1½ to two 2 per cent range predicted by various forecasts.

The important question is: where will growth come from? Households are over-indebted, private sector firms are not investing, and governments are cutting back. Quite frankly, it looks bleak: at this point, only exports could give the economy a much-needed boost (but see below).

The labour market 

This is one of the weakest links, and certainly an indication that the economy may be heading in the wrong direction.

Unemployment is up, and job creation is down — nowhere near the pre-crisis levels. In fact, job losses are happening all over, not just in Alberta and Newfoundland as a result of the oil crisis but with companies like Sony and Target as well as other stalwarts of the Canadian landscape, Tim Hortons and CIBC.

We also need to expect ripple effects from the oil crisis that could bleed into other provinces.

Fiscal policy

Whether Harper will have a deficit or not (he will), is irrelevant at this point. What matters is whether his government’s fiscal policy is helping or hindering economic growth. 

Research shows austerity is a scourge on economic growth; it slows the economy down, and this is precisely the “strategy” (I use the word lightly) chosen by the Harper government. Harper’s single-minded obsession with fiscally-balanced budgets is contributing in a very real and important way to the slowdown in the Canadian economy.

In fact, it is damaging it outright. Now, even the IMF agrees, and that says a lot.

Monetary policy

With the Bank of Canada reducing rates, and possibly again on March 4, it is a clear indication that the Canadian economy has slowed. But there is far worse to fear. 

The yield curve, a spectrum of yields on bonds of various maturities, has inverted. As of last week, the return on five-year bonds was actually lower than the overnight rate of 0.75. 

This is a big deal and it does not happen often. This is a sign that markets are factoring in another decrease in overnight rates, and reflects a general uneasiness about the direction of the Canadian economy. 

This usually happens before a recession, and occurred, notably, right before the 2007 crisis.

The Canadian dollar

The Canadian dollar is tanking, and sinking fast, much faster than anyone had predicted.

For me, this is not a great concern but certainly worth watching. The upside of this is that it should be a great benefit to the manufacturing industry.

It in unclear how much boost it will give to our economy, however.

Exports

In November, Canada’s manufacturing sector shrank by 1.9 per cent even though our dollar was falling. This was a surprise to market observers who were expecting a slight upward bump given our weaker dollar.

To get our economy going, exports remain (unfortunately) our last hope. But to get our exports to grow, we must rely on the strength of the U.S. economy and the growth of some of the emerging markets, China in particular. 

And how are those economies faring?

Well, after growing at close to five per cent in the second and third quarters of 2014, the U.S. economy has slowed down to 2.6 per cent in the fourth quarter (lower than expected) and has a 2013 Q4 to 2014 Q4 growth rate of only 2.5 per cent — which is less than the 3.1 per cent, recorded in 2013.

As for China, it, too, has slowed down considerably. 

It is unclear what the net effect will be. But for Canada to experience a real growth momentum, exports need to be considerable in order to compensate the drag from the oil crisis and austerity measures.

At the moment, it does not seem exports will be sufficient to overcome the weakness in other parts of the economy. But things can change; if they do, it will take some time.

So the signs are all around us. And Canadians have yet to witness the full brunt of the oil crisis, not to mention what could happen to the real estate bubble. At this point, short of fiscal stimulus, which will never happen under the Harper government, it is impossible to exclude even the possibility of a recession in Canada toward the end of 2015.

This must have Harper and the Conservatives scared. If they are not, they should be: things will only get progressively worse between now and October. 

Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.