Government, Central Bank stimulus winds down

The Canadian economy is giving every indication of faltering less than a year into the recovery — with output likely having already dipped into negative territory this summer.

OTTAWA — The Canadian economy is giving every indication of faltering less than a year into the recovery — with output likely having already dipped into negative territory this summer.

Statistics Canada won’t issue gross domestic products numbers for July until next week, but Wednesday’s news that retail sales fell 0.1 per cent in the month may be the final nail in the coffin.

July has produced dips in all the major measured indices — employment, net trade, manufacturing shipments, wholesale sales and housing starts.

Also on Wednesday, the CIBC became the second commercial bank to officially slash its growth forecast for the second half of the year and for 2011, following the TD Bank’s downward revision last week.

The new projections say the economy will crawl forward by about 1.5 per cent in the second half of 2010, followed by anemic growth of 1.9 per cent next year — one full point below the Bank of Canada’s last call.

The growing pessimism presents new challenges to the Conservative government in Ottawa, which has been boasting of its economic management credentials while issuing dire warnings should the levers of power fall to the opposition.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have also been adamant that the economy needs no more stimulus help from the public sector, and won’t get any in the spring budget.

But the CIBC analysis argued that government stimulus provided the key artificial boost that produced all the good news late last year and early this year, including the 430,000 jobs gain of the past 12 months.

The bank’s calculation is that a major portion of those jobs came from stimulus, directly in public sector hiring, and indirectly through construction activity — accounting for 35 per cent of all the new jobs, and for the most part the good-paying jobs.

“I think we should be careful in withdrawing stimulus,” said Benjamin Tal, deputy chief economist with CIBC. “The risk of overshooting withdrawing stimulus is much higher than the risk of not doing it.”

The advice for Bank of Canada governor Mark Carney is more pointed: Tal said Carney should cease raising interest rates until the spring.

The central bank has hiked three times since June, taking the policy rate to one per cent. Until indicators turned south, it had been expected to lift the rate at least once more at the next meeting in October.

But Tal said the Bank of Canada has been much too optimistic about the strength of the recovery and will need to backtrack.

“This was the most non-linear recovery ever, where you have a very strong start stimulated by artificial money and now you are slowing down because you don’t have those measures,” said Tal.

Analysts estimate government stimulus spending is contributing about 1.5 per cent to growth at present, a boost that will run out at the end of March.

In the House of Commons, opposition parties blasted the finance minister’s statement the previous day that 400,000 jobs could disappear under their leadership, with Liberal Leader Michael Ignatieff accusing the government of practising the politics of “fear, division, envy and resentment.”

NDP Leader Jack Layton also questioned whether the economy is actually in recovery given what he termed the loss of “a quarter of a million full-time jobs.”

“I am the first to say … that our economy has not yet fully recovered,” Harper conceded, but said government policies are working.

The CIBC forecasts projects job growth will be sluggish for the next year and a half, with the unemployment rate never dipping below the current 8.1 per cent until the end of 2011.

Canada’s current difficulties are not all based on domestic factors.

Scotiabank economist Derek Holt said the U.S. slowdown, even sharper than Canada’s, is taking a toll on Canada’s export industries.

Still, few analysts see a recession for Canada in the foreseeable future — only feeble growth.

Canada continues to perform among the leaders in the industrialized world, with fundamental strengths such as a solid banking sector, a housing market that has not imploded, and resource riches, particularly oil, that the world is still eager to purchase.

“It looks like the economy has gone from fourth gear to second or possibly first,” said Douglas Porter of BMO Capital Markets. “I wouldn’t say we were at neutral or reverse just yet.”