2013 Canadian and Global Economic Forecasting

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The battered global economy.

A succinct, unequivocal statement rife with nauseating repetition, having been bandied about for so long that it easily qualified as a broken record eons ago – or a broken CD, to better match the technological era to which we now live. Whatever the terminology, it’s lingered like a bothersome bad rash since 2008.
While there’s still no concrete evidence that many nations are primed to pick themselves out of the doldrums and get back onto a productive economic track, there is a glimmer of hope some of the largest economic engines on the planet are slowly but surely beginning to claw their way back. Through all the widespread uncertainty Canada, to its credit, has routinely remained near the top in terms of prospering countries in large part due to our stringent regulated banking system.

Several key heads of state and their financial ministerial cohorts from around the world will be instrumental in determining the progress of the international economic recovery. With the world’s eyes focused solidly on the United States, the necessity for American President Barack Obama and Republican House Representative Leader John Boehner to work closely together will be the single biggest factor in determining the stability not only for our friends to the south but much of the rest of the world as well. The European Union remains a shambles. Greece is no further ahead now than it was a year ago, continuing to ride the fine line of outright bankruptcy, all the while many of its citizens protest – some violently – in the streets, balking at painful austerity measures demanded from such countries as Germany, who will only assist on the proviso cutbacks are evidenced.

Bank of Canada

At the centre of Canada’s economic policymaking is federal Finance Minister Jim Flaherty, who’s had a busy year that showed no signs of letting up.

Undoubtedly the biggest internal news surfaced in November when it was announced Bank of Canada Governor Mark Carney would be stepping down from his post as of the end of June in order to take on the same role in the United Kingdom, where he’s been lured to sort out England’s gigantic mess of an economic banking system.

Speaking of the Bank of Canada, it is unlikely to increase interest rates until at least the fourth quarter of next year, which will be long after Carney’s departure and be squarely in the hands of his successor. Carney himself must have tired of verbalizing upcoming rate hikes, which haven’t taken hold for well over a year.

The central bank desperately wants to raise borrowing costs, but market expectations and sluggish performance have prevented that from happening due to the sputtering global economy. No doubt rate hikes would help solve the major headache of dealing with soaring household debt and a hot housing market.

However, the latter has been cooled significantly since Flaherty made changes to the mortgage rules earlier this summer in order to lessen Ottawa’s exposure to bad debt: i.e. Canadians who get themselves in over their heads and wind up defaulting on their mortgage.

According to Bank of Canada survey data, 52 per cent of businesses expect inflation to average in the 1 per cent to 2 per cent range over the next two years; 43 per cent expect inflation to average 2 per cent to 3 per cent.

The December policy announcement maintained the Bank of Canada’s continued commitment to raise rates, stating “over time, some modest withdrawal of monetary policy stimulus will likely be required… the timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”

That’s a very long-winded version of “the economy is still sluggish, so don’t expect rate increases anytime soon.”

Canada’s largest private sector bank is optimistic that 2013 is going to yield strong results for the national economy.

The Royal Bank’s latest quarterly growth prediction is that the economy will increase to 2.4 per cent next year and continue the trend with expansion of 2.8 per cent in 2014. That would represent a huge turnaround given 2012 saw the weakest growth rate since the recession and a virtual stall in the third quarter.

The forecast is slightly higher than the Bank of Canada’s expectations for a 2.3 and 2.4 per cent rate of growth in the two years. Many other banks and financial analysts seem to believe an even 2 per cent in 2013 is a more realistic figure to be targeting.

The Canadian banking system is held in high regard throughout the world and has been an anchor for the country surviving the economic downturn so well, but it’s by no means infallible as noted by Standard & Poor’s recently downgrading the ratings of six of Canada’s financial institutions by one notch.

The credit ratings agency cites a softening economy, low interest rates and pressure facing Canada’s economy as we head into 2013.

S&P lowered its ratings by one notch on Scotiabank to A-plus. National Bank of Canada, Laurentian Bank of Canada, Central 1 Credit Union, Caisse centrale Desjardins and Home Capital Group were also lowered one notch.

Flaherty, the man widely credited for helping keep Canada’s economic head above water during the past five years of economic upheaval, appeared as a keynote speaker during a Toronto luncheon sponsored by the Toronto Board of Trade, where he outlined his broad-stroke economic projections for 2013, offering up a very blunt, straightforward message and indicating there will be no new risky spending schemes or tax increases. He also indicated the federal deficit would not disappear until 2016-17, but the governing Conservatives intend to balance the budget before the next election in two years.

”In uncertain global economic times, one of the most important contributions a government can make to bolster confidence and growth in our country is to maintain a sound fiscal position,” Flaherty says.

In Ottawa, NDP deputy finance critic Guy Caron says Flaherty has failed to produce a consistent message on when the deficit will be eliminated.

Flaherty says he still supports enhancing the Canada Pension Plan – just not right now. He says the current fragile economy is not able to withstand an increase in premiums on workers and employers.

Another unforeseen jolt was the unexpected plunge in Canadian manufacturing sales numbers, which plunged 1.4 per cent in October from September, marking the sharpest decline in in nine months. Much of the blame was immediately placed on weakness in major sectors such as automotive and primary metals.

The dismal report from Statistics Canada follows other recent figures confirming what everyone already knows – the economy is still sputtering.

Flaherty’s Outlook

Despite bleak economic figures dominating many countries, Canada has been near the top in terms of performance. Cumulatively, the country is nearly 400,000 jobs ahead of pre-recession numbers and impressively about 90 per cent of those jobs have been created in the private sector. Other than banking, a variety of other business sectors are being noticed by investors, who point to sound fiscal management in providing stability and a competitive advantage through what are tough economic times. Those are the bright spots. But growth will be less than originally forecasted and balancing the budget will take longer to achieve and certain tax credit measures are being put on hold as well. The key is finding the right combination of stimulus and fiscal prudence and building of a new long-term infrastructure plan, which among other things, would allow for increased partnerships between the private sector and government.

“This is a challenging time for the global economy and we’ve seen challenges coming from most every direction,” Flaherty notes. “It’s been a remarkable time if you look back over the past five or six years at the repetitive economic challenges that the world has faced, including what the economists have now called The Great Recession of 2008-09 and the struggle to recover from that, which we’ve seen especially in Europe to this day.”

“Our government is remaining completely focused on the economy and supporting job creation in the medium and long term,” Flaherty continues. “We’re not going to raise taxes on Canadian businesses.”

The next federal budget looms large and was a topic open for discussion with the finance minister. As the policy statement of the federal government it offers a transparent view of just where we stand as a country and what direction we’re heading into the future.

“We go through a lot of different methods to make sure we hear from Canadians,” Flaherty remarks. “It’s important that we sit down in roundtables, town hall meetings and online consultations with Canadians and allow them to have a say in how their government works in the future.”

“During my time as finance minister we have dramatically expanded the consultation process, including online consultations.” he continues.

Flaherty focused on three primary areas: where we are today – our strengths and major threats to our continued success; secondly, how the government’s record of fiscal responsible management has made Canada’s economy resilient and finances sustainable; and thirdly, what it all means moving forward.

“It’s important to remember Canada is positioned relatively better than many of our peers in the industrialized world,” Flaherty offers. “I don’t say that to boast about Canada, but merely to point out that our economic policies to date have worked and our positioning is very good and we’re on the right track.

Canada’s Economic Action Plan has worked and obtained the results we were seeking; in particular when we made the major decision in December 2008 to go from a balanced budget to a $58 billion deficit within 30 days. We did it to avoid what we feared would be a long, deep and dark recession in Canada with millions of Canadians out of work.”

That foresight on policy implementation program allowed Canada to rebound with the strongest and quickest recovery in the G7. It means Canada can get away with saying a lot of things other nations cannot say about their own economies. All the lost jobs have been recovered with more created.

“Over 820,000 net new jobs have been created in Canada since the end of the recession in July 2009,” Flaherty reveals. “Employment is now more than 390,000 jobs more than the pre-recession high and Canada has the highest job growth in the G7.”

Real GDP is also significantly higher than pre-recession levels, which is also the best performance in the industrialized western world – and the rest of the planet has taken note of Canada’s resiliency with Flaherty believing the Canadian brand has never been stronger.

The Secretary General of the Organisation for Economic Cooperation and Development Angel Gurria has publicly stated that Canada was well prepared to weather the storm of global economic volatility, praising the country’s fiscal and monetary policies and the overall financial system.

While Canada has positioned itself well, the one single major concern is watching the progress south of the border. The U.S. economy is still the single-most important aspect in terms of what drives global economics. Flaherty admits the world is watching nervously to see how things play out.

“The United States really needs to move forward with a medium-term plan to deal with deficits and accumulated public debt,” Flaherty declares. “Were it not to be dealt with, as (Federal Reserve Chair) Ben Bernanke has said, the consequences for the U.S. economy would range between 4 and 5 per cent of real GDP over the course of the year.”

Such a scenario would have a negative domino effect on Canada, given that we still do about 75 per cent of our entire trading with the United States.

On the second point of the government’s record of fiscal management making the economy more resilient, Flaherty says far too often we’ve seen nations crippled because they’ve lived well beyond their means for decades. Although Greece wasn’t mentioned by name, it would certainly go to the top of that inauspicious list.

“These are governments without viable or realistic plans to ensure long-term fiscal sustainability,” Flaherty candidly remarks. “We have, in our government, followed a different path. We’ve made the necessary decisions to ensure Canada’s return to balanced budgets and long-term fiscal sustainability.”

When the Conservatives took office in February 2006, the biggest concern focused on deficits and debt in the United States and the absence of a medium and long-term fiscal plan. Paying down public debt and running balanced budgets in Canada became all the more crucial.

“We paid down about $38 billion worth of public debt in 2006-07 and then we got into 2008 and the recession came,” Flaherty says. “But we were in one of the best positions of all the industrialized countries to deal with the consequences of the recession in cooperation with the provinces – and they were very cooperative – to do about 4 per cent of GDP stimulus, which is what the G20 leaders had agreed to in Washington in November 2008.”

“We did have to make the decision of running up the deficit in 2009-10,” Flaherty restates. “As part of the Economic Action Plan we always built in getting back to balanced budgets in the medium term – the middle of the decade – and we’re on track to do that.”

The feds have gone from that $58 billion deficit to less than half of that right now. Flaherty says the same path will continue over the next two years in order to reach a balanced budget.

“If you look at the nature of government spending in Canada, about $275 billion year, we have to pay interest on the public debt,” Flaherty relates. “About one-third of the money you pay as taxes goes in transfers to the provinces. Some of that is equalization but a lot of it is healthcare and the Canada Social Transfer for education and social services.”

The finance minister made it clear he will not reduce transfers to the provinces for education or for healthcare and in fact there are plans to increase payments out into the next decade. Another one-third of federal spending goes to individuals, including seniors, children and people with disabilities. That leaves the feds with one-third of the money Flaherty says they can really control.

“Spending control is not always a popular path but it is the responsible one,” Flaherty says. “We are committed to it and we hope Canadians can understand and support it.”

The federal government also has a new venture capital initiative, designed to help support the creation of venture capital funds led by the private sector and not the government. The aim is to increase private-sector investment in early stage risk capital in the country. There’s also an extended hiring credit for small business which is in the budget bill that the finance committee in Ottawa was scouring over. Flaherty says small business is the lifeblood of the Canadian economy and it’s essential to ensure such enterprises have the necessary tools to be able to succeed.

“There are more than 500,000 small businesses that can use this tax credit even if they hire just one person,” Flaherty reveals. “We did it last year and we’re doing it again this year because we know it’s effective in job creation.”

Natural Resources

Further good news was recently announced by the Conference Board of Canada, whose analysis has determined that natural gas investment and production is expected to add nearly $1 trillion to the Canadian economy and generate an average of 260,000 jobs annually over the next 24 years.

“Clearly, the natural gas industry contributes to Canada’s economy and to the economy of each province,” says Len Coad, Director, Environment, Energy and Technology Policy. “While the benefits are most concentrated where natural gas is produced, economic impacts are felt in manufacturing, construction and services industries in all provinces.”

Total natural gas production in Canada supports nearly 130,000 jobs and generates over $24.5 billion in economic activity per year. Natural gas accounts for 37.7 per cent of Canada’s primary energy supply, satisfies 30.6 per cent of energy demand, and makes up 42 per cent of Canada’s energy exports. Canada ranks 18th in the world in proven reserves of natural gas, third in production and fourth in exports.

The Conference Board estimates that Canadian demand for natural gas will double between 2012 and 2035. This estimate is based largely on three factors: natural gas demand for bitumen production (Alberta’s oil sands), electricity generation (largely in Alberta and Ontario), and exports of liquefied natural gas (LNG) in British Columbia. However, Canada’s growing demand will be met by declining exports to the United States; over the forecast period, Canadian natural gas production will remain roughly constant.

Still, the Conference Board estimates that natural gas industry will invest $386 billion (in 2012 dollars) over the next quarter-century to maintain production levels. The investments will be centered in British Columbia ($181 billion) and Alberta ($154 billion).

The upstream industry, which includes exploration, production, gathering systems, and liquids extraction facilities, will account for almost 76 per cent of the total investment. Such levels of investments are forecasted to generate $364 billion in real GDP, and support an annual average of 131,000 jobs per year.

This investment would also contribute to labour income ($10.7 billion annually), corporate profits ($2.5 billion annually) and to government coffers ($5.3 billion per year in tax revenues).

Natural gas production will contribute another $576 billion to Canada’s economy between 2012 and 2035, supporting 129,000 jobs per year.

In all, Canada’s natural gas industry is expected to add a cumulative $940 billion to Canada’s economy over the next 24 years, and generate roughly 6.2 million person-years of employment. In other words, the industry is expected to support employment of nearly 260,000 jobs per year over the 24-year forecast horizon.

The upstream investments shown for Quebec ($6.8 billion over the forecast period) reflect the potential for shale gas development in that province. Additional shale gas resources exist in Quebec, as well as in New Brunswick, but development of these opportunities is not included in the investment outlook. Regulatory decisions about whether and how to proceed with exploration and development are pending in both jurisdictions.

Quebec, Ontario, and Manitoba benefit from the industry’s activity, through both direct investment in their economies and supplying increased demand for manufactured goods and services from investments in Western Canada. Although only 7 per cent of the direct investments will occur in Ontario, the province will receive 18 per cent of the resulting employment and 16 per cent of the total increase in labour income.

Over the 24-year horizon, natural gas investments will help create 560,000 person-years of employment in Ontario, and 199,000 person-years of employment will be created in Quebec. Saskatchewan is expected to gain 92,400 person-years of employment and Manitoba 39,200 person-years. The smallest jobs impact will be in Atlantic Canada.

International Challenges

The success of Canada’s economic upswing will largely be dependent upon many other western countries and their ability to recover. You can only keep yourself insulated for so long before the need for exporting trade takes a large bite out of a country’s economic health.

As the head of the banking system in United States Federal Reserve Chair Ben Bernanke could easily be regarded as the single-most important figure in international economics. Assuming the Democrats and President Barack Obama and Republicans and John Boehner can see past political partisanship, the U.S. economy is expected to continue making a slow upward improvement this year.

In Europe, Germany and Chancellor Angela Merkel is about all that separates several countries from outright bankruptcy, most notably Greece. However, Merkel has also remained adamant that Greece shouldn’t be granted leeway on terms for its bailout, rejecting signals from her foreign minister that creditors may relent on austerity measures. The planned austerity measures have been met with mass protests throughout the streets of Athens and other cities, with some turning violent.

Meanwhile, the United Kingdom’s sputtering banking system will rely on current Bank of Canada Governor Mark Carney when he takes on the same position with the Bank of England starting on July 1. Canada’s loss is certainly Great Britain’s – and perhaps all of Europe’s – gain. Carney will answer to George Osborne, the UK’s Chancellor of the Exchequer and Second Lord of the Treasury – which is essentially the equivalent to our federal finance minister.

The United States, the European Union and China: the global triumvirate that will shape the world’s economic standing for years, if not decades, to come.

By Angus Gillespie

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