Economists say a federal election unlikely to derail Canada’s economic recovery

OTTAWA — Conservative warnings that an election could derail the recovery are being met with hoots of derision from the opposition and mostly skepticism from the experts who should know — economists.

OTTAWA — Conservative warnings that an election could derail the recovery are being met with hoots of derision from the opposition and mostly skepticism from the experts who should know — economists.

Prime Minister Stephen Harper stepped up his attack on the Liberal opposition Wednesday, repeating his contention that an election could “screw up” the recovery.

The warnings have become a staple of the Conservative attack against Liberal Leader Michael Ignatieff. On two separate occasions this week, Transport Minister John Baird also sounded the alarm, saying a vote now risks delays to infrastructure projects sustaining the economic recovery.

The warnings were given some credence when the Canadian dollar took a hit Tuesday afternoon immediately following Ignatieff’s declaration that the Liberal opposition will no longer back the minority Tory government. However, the loonie had already been heading south before the leader’s remarks, mainly on falling oil prices and financial markets.

Both Liberal and New Democrat finance critics dismissed the warnings from the Conservatives as political posturing.

“That’s quite the nerve coming from Stephen Harper who called the last election at a time of a very severe recession,” shot back John McCallum, a former Royal Bank (TSX:RY) chief economist who is expected to land an economic portfolio if Ignatieff’s Liberals were to form the government.

NDP critic Thomas Mulcair said if an election were to happen, it would be because Harper provokes one by not co-operating with the opposition parties.

Economists were mostly unconcerned about any potential crippling impact of an election.

“The Canadian economy is the sum of a heck of a lot of decisions, by investors, by businesses, by consumers across Canada, in the U.S. and abroad, so how well the economy is going to do probably depends a lot more (on other factors) than what’s going on in the electoral scene in Canada,” said Finn Poschmann, an economist with the C.D. Howe Institute think tank.

The warnings may make for good politics, but they are in general bad economics, the economists say.

At best, they may impact the economy in theory and on the margins, they add.

TD Bank chief economist Don Drummond, a former senior Finance official, noted that during elections and for longer periods if the government changes hands, there is a slowing in spending by departments, particularly of discretionary spending.

However, the effect on Ottawa’s $12-billion infrastructure stimulus designed to fight the recession would be minimal, if at all, he added.

”This would affect only a certain type of infrastructure spending that was coming up for approval, but a lot of it would have already been approved, as the (government) said in their last report,” he pointed out.

“Once it has cabinet approval, the bureaucrats could kick that into action.”

Economists have a little more sympathy for Harper’s contention that an election risks political instability and could affect confidence in markets and the economy in general, although even here, they say the prime minister is stretching a point.

Under normal circumstances, the shutting down of government during the six weeks of an election would have little repercussions on the behaviour of businesses, markets and consumers, noted Ian Lee, MBA director of the Sprott School of Business at Carleton University in Ottawa.

He pointed out that Japan, which fell the hardest during the recession, just recently completed an election and yet still managed to be one of the few countries to manage growth during the second quarter. By contrast, Canada’s economy shrank by 3.4 per cent during the period.

But with the Canadian recovery just beginning and still fragile, these are not normal times.

“You could argue that it may shatter this very fragile confidence and confidence is an intangible, and cause some businesses to cut back on plans,” he explained, adding: “I still think it’s somewhat tenuous, but it has some merit.”

The corollary, however, may also have merit, he agreed. If Canadians were to believe a new government would perform better, confidence may rise as a result of an election.

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