OTTAWA — Pressure intensified on the federal government Wednesday to change course on austerity measures as it prepares for its economic update in light of a weakening economy.
Liberal Leader Bob Rae blasted the government in the House of Commons for its fixed position, saying the world “is on the brink of a major recession.”
At the very least the government should cancel the scheduled employment insurance premium increases slated for Jan. 1, which Rae said would siphon $1.2 billion out of the economy.
The NDP pushed again for a “plan of action” on jobs through infrastructure spending now that employment has flatlined in Canada.
But Finance Minister Jim Flaherty refused to say whether he has ordered his officials to prepare a Plan B in case the economy deteriorates.
“If we get a shock from outside our country, then we will have to be responsive and we’ll be flexible and pragmatic,” he said.
Private sector economists interviewed made clear that Ottawa should indeed be prepared to change course.
That’s because, they say, while hardly any of the established forecasters have a recession built into their baseline projections, confidence in the baseline — or most likely — scenario is low.
“This is an environment of unprecedented uncertainty,” said Craig Alexander, TD Bank’s chief economist, who puts the odds of an outright recession as high as 40 per cent.
“Doing a fiscal update this fall is going to be extraordinarily difficult. The government will use the same methodology it always has, but you might want to keep your powder dry so in case something goes wrong, you can pull the trigger and act.”
With the global economy slowing, demand is falling for Canadian oil, copper, grain, chemicals, wood and other resources that have underpinned the export economy for years.
That will likely lead to weaker job growth in the resources and manufacturing sectors — which could make it more difficult for Canada’s 1.4 million unemployed to get jobs and push up the 7.3 per cent unemployment rate.
A key problem facing Flaherty, says Conference Board economist Pedro Antunes, is that at the moment the economic fundamentals look soft, not recessionary.
Unfortunately, that’s not much consolation since all of the known economic markers are stale. Those statistics represent the economy before the wrenching debt-default drama in the U.S. and very real possibility of a Greek default sank investor and consumer confidence in late summer.
The mid-August crisis sent stock markets on a downward spiral, while consumer and business confidence ratings plunged.
Economists believe the third quarter, which ends Friday, will post a rebound from the second’s 0.4 per cent contraction. But the last three months of this year will again be weak and could prove recessionary.
What happens after that is anyone’s guess, says CIBC chief economist Avery Shenfeld.
It won’t depend as much on economic fundamentals as to what happens politically. Will European leaders backstop Greece and the banks? Will they create a big enough emergency fund? Will the U.S. Congress pass President Barack Obama’s US$450 billion jobs program and budget.
These are impossible for businesses, consumers, or the federal government, to answer, say analysts.
“I can’t recall a period where so much of the outcome will depend on political decisions rather than economic trends,” said Shenfeld.
Investors are also operating in the dark. The future-looking equity markets have been schizophrenic since August, jumping from one extreme to another on any news or rumour.
The Toronto index was up Monday and Tuesday on news coming out of the weekend finance ministers meetings in Washington indicating European leaders were preparing to act on the sovereign debt issue. It plummeted 235 points Wednesday on hints from German officials that the country is not prepared to expand the emergency fund for European banks, or maybe even adopt the current proposal without changes.
Bank of Montreal’s Douglas Porter, who believes the odds of a recession in Canada are as high as one-in-three, adds there’s also possibility of stronger growth than the 1.8 per cent he is predicting for 2012.
“There’s still a chance a lot of things go right and nothing goes wrong,” he said. “It’s extremely difficult giving (government) helpful advice in this kind of environment.”
Flaherty is expected to table his economic update next month, but has shown in the past that the mid-term report is not the final word on Ottawa’s fiscal thinking.
In late 2008, after most economists were warning that the world had likely fallen into a recession, Flaherty introduced a document that predicted a surplus budget and no stimulus.
Two months later, he tabled the biggest stimulus spending budget in history.