Trudeau Curbs His Economic Enthusiasm Despite Canada Leading G-7
(Bloomberg) -- Canada’s economy is booming, though you’d hardly know it from listening to Prime Minister Justin Trudeau.
It’s the type of liftoff Trudeau’s government foretold when it broke from a generation of the country’s balanced-budget orthodoxy and pushed further into deficits. Since February, “no major country or economic region has enjoyed as positive a string of economic surprises as Canada,” Warren Lovely of National Bank Financial wrote on June 13.
And yet it’s something Trudeau has rarely mentioned before this week, when he celebrated Canada’s addition more than 300,000 jobs over the past 12 months. Even then, he stopped short of claiming credit -- saying numbers could slip month-to-month and that his growth plan is still in its early stages.
“We don’t see the value in touting and waving around any given month’s positive numbers when we know the next month might be a slight dip and the month after that might be a slight rise,” the prime minister said Tuesday in Ottawa. “Our focus as a government is very much on the long-term.”
He also alluded to uncertainty facing Canada, saying the world is in a “time of transition.” No government wants to tie itself to an economy facing headwinds that could cool things off, and in Canada the risks are clear -- oil prices are slumping, fears of a housing correction abound, rising rates could hit consumer spending and President Donald Trump’s administration is rattling its saber on trade.
“It looks like the party that’s been going on for a while isn’t going to stop any time soon,” Randall Bartlett, chief economist for the University of Ottawa’s Institute of Fiscal Studies and Democracy, wrote in a report this month. “But the party can’t last forever.”
Statistics Canada reports April GDP data on Friday, and economists predict it gained 0.2 percent on the month and 3.4 percent from a year earlier. The latter would be the fastest pace since June of 2014.
Trudeau isn’t the only official shy about the growth and jobs data. When asked this month if he takes credit for the uptick, Finance Minister Bill Morneau said his government’s deficit spending plan is spurring job growth and consumer confidence in particular, while warning there’s more work to be done.
“Our approach is starting to have the impact on the economy that we were hoping to have,” he told reporters this month, hailing a budget that advances plans for infrastructure spending. “We’re making a difference and we want to move forward to the next step.”
Part of Trudeau’s reticence may stem from political pledges. He was the only major party leader in the 2015 election to pledge deficits because he said government needed to stoke growth.
Morneau’s debut budget projected that program spending would add 0.5 percentage points to growth in the fiscal year that ended March 31, and 1 percentage point in the current year. The country isn’t on pace for that, instead tracking to add about 0.4 percent in 2017, Toronto-Dominion Bank economist Brian DePratto said, adding “it’s hard to see a whole lot of impact” from government measures so far.
Trudeau himself said Tuesday that’s by design -- and his government has always avoided casting its plan as stimulus. Infrastructure spending, for example, will “take a while to get rolling, take a while to have that positive impact,” the prime minister said.
Down to Earth
The pick-up in Canadian growth -- particularly with government spending playing a less-than-forecast role -- could cast doubt on Trudeau’s reasoning for deficits. And yet there are persistent risks with Canada’s economy entering what DePratto called a transition period.
“Having that government support in there keeps that growth rate strong,” he said. “If you lose one of those drivers, having government sit as a bit of a backstop to growth -- there’s something to be said for that.”
One key measure taken by Trudeau was an overhaul and expansion of child benefit payments -- in effect, funneling more money to low-income parents. It has provided a one-time boost since last summer and won’t continue to add new growth each year. Trudeau alluded to it Tuesday as a factor that will pay long-term dividends.
Recovery from major fires last year in the heart of Canada’s oil patch, Fort McMurray, is also giving a short-term boost to GDP. Canada is on track for real GDP growth of 2.5 percent in 2017, the best in the Group of Seven, with the U.S. coming in second at 2.2 percent, data compiled by Bloomberg show.
Interest rates are set to increase and there are signs that the housing market is finally cooling, signaling that residential investment will “pull back as a driver of growth going forward,” Bartlett wrote. Gains in trade and business investment won’t be enough to offset the change and growth will slow after this year as “the Canadian economy comes back down to earth,” he wrote.
Federal measures may not stave off a slowdown -- for instance, there’s no evidence that major infrastructure spending has begun and the federal plan is spread over so many years “that it won’t produce much short-term bang for the buck,” he wrote.
Continued strength in the Canadian economy could be a political victory for Trudeau, who faces regular attacks from rival politicians for deficits of nearly C$30 billion ($23 billion), or three times the scale of what he campaigned on. Asked Tuesday when he would return to a balanced budget, Trudeau declined to give a date. He reiterated his government’s desire to “focus on the investments needed to grow the economy” instead of “balancing the books arbitrarily and at all costs.”
The improving economy will cut the Canadian deficit by a cumulative C$12.9 billion from this year’s budget through to the 2019-2020 fiscal year, which will be Trudeau’s pre-election budget, Lovely forecast in his report earlier this month. Risk factors such as housing and U.S. policy uncertainty still threaten to cool things down.
“For now, however, Canada’s surprisingly robust expansion gives the federal government greater latitude,” including to come in with a smaller deficit, Lovely wrote. “And that’s not a bad place to be.”