Greg Weston: U.S. drive toward fiscal cliff keeps Canada on edge

While the U.S. economy is unlikely to drive off the much-touted  "fiscal cliff" barely seven weeks down the road, Canadians are being warned to buckle up for a possible rough ride in the year ahead.

Later this month, Canada’s Finance Minister Jim Flaherty will present his regular fall economic update, a fiscal roadmap for the months ahead until the next federal budget.

Government sources say Flaherty’s message will be prudence and caution at every turn as the Canadian economy remains inextricably hitched to Uncle Sam’s rear bumper on what is sure to be a wild ride for the next few months at least.

Overhanging all economic plans in this country and south of the border is the biggest warning sign of all: "Fiscal cliff ahead."

The now infamous fiscal precipice is a confluence of almost $600 billion of cuts to U.S. government programs and lapsing tax reductions – call them tax hikes – starting at the end of this year.

Most experts seem to agree the fiscal shock of withdrawing that much stimulus at once would almost certainly throw the U.S. back into recession – and take Canadian jobs and prosperity down with it.

TD Bank economist Craig Alexander, for one, tells CBC News bluntly: "It would wipe out economic growth in Canada."

This economic abyss is the handiwork of a gridlocked Congress, a standoff between a Republican House opposed to raising taxes and a Democratic Senate that won't cut social programs.

And at the edge of the cliff stands Barack Obama, a president who has been unable to broker a compromise.

The bad news is the same president and split Congress have just been re-elected.

The good news is few experts close to this looming economic debacle believe that either Obama or Congress will let the entire North American economy – not to mention the rest of the world – go over a cliff.

As TD Bank’s Alexander says: "It is virtually guaranteed they will find some way around it."

But he adds: "I’m not going to say it's going to go smoothly."

Bank of Canada governor Mark Carney says the financial community assumes Congress and the president will find a way to avoid the cliff.

But he cautions that getting to that solution is going to create a period of uncertainty in the markets and in business that will blow back on Canada.

'Pragmatic, sensible government'

If the Harper government has a Plan B in the event the U.S. economy does go into recession, the details are a tightly guarded secret.

Finance Minister Flaherty assured a Commons committee this week the government would intervene much as it did in the global economic crisis in 2008.

"We are a pragmatic, sensible government," Flaherty told the Commons finance committee this week.

"If our economy goes into recession because of an external shock from the U.S. or the eurozone or both, we will take steps to stimulate the economy."

Carney echoed the minister, saying the central bank would come to the rescue with its own monetary stimulus, but only after the fact.

"We don’t need to do that in anticipation of the Americans not coming to an agreement."

In the meantime, government insiders say Flaherty’s economic update later this month will sound a lot like the one last fall.

It will likely begin with all the good signs in the Canadian economy such as positive growth, however modest, a shrinking deficit, and cuts to government spending.

The update will even have some positive news for average Canadian families.

For instance, it will likely predict interest rates remaining close to their historic lows through 2013, with inflation contained at a steady two per cent.

The Canadian dollar will remain strong relative to the U.S. currency for at least three years, the economic outlook will portend.

And unemployment will decline gradually over the next five years.

Economic uncertainty

So what is there to worry about on this side of the border? Just about everything happening outside our borders.

Even if the U.S. economy doesn’t go over a cliff, it is expected to remain sluggish for some time to come.

And if American business and consumers aren’t spending, that’s lost business and jobs for the roughly 75 per cent of Canadian exports that depend on the U.S. market.

The year following the 2008 crash, for example, Canadian exports to the U.S. dropped by almost 30 per cent, shutting factories and throwing thousands of people here out of work.

Exports still haven’t recovered to pre-2008 levels.

The Harper government is doing all it can to open new markets in China, India, Brazil and other emerging economies. But that’s not going to happen overnight – China buys less than four per cent of our exports; the others even less.

Despite all the media attention to the headline-grabbing "fiscal cliff" facing the U.S. economy, the biggest worry inside the Harper government is another economic collapse in Europe.

Bank governor Carney says bluntly: "We’re looking for Europe to contain the crisis, not solve the crisis."

With a world of economic uncertainty, no wonder a lot of Canadians are doing their Christmas shopping early.