OTTAWA — The latest round of turmoil on the global financial markets is threatening the Canadian economic recovery once again, but this time economists say Ottawa’s ability to respond is more limited with the books in deficit and interest rates already near record lows.
And while Canada is in better shape than its counterparts in the G7 and may have some room to spend, it is not clear just how much domestic policy can offset the problems in the U.S. and Europe.
TD Bank chief economist Craig Alexander said the first line of defence is the Bank of Canada and its key lending rate, which the central bank could cut if needed to boost the economy.
In 2008 before the financial crisis hit, the Bank of Canada’s overnight rate target was three per cent. The central bank moved quickly and in concert with others around the world cut rates to restore consumer and business confidence. Borrowing costs eventually hit a low of 0.25 per cent in April 2009 where it stayed for more than a year.
Today, the rate target sits at one per cent, higher than the U.S. Federal Reserve’s policy rate, but still near its record low.
“Canada has the advantage of being able to lower interest rates unlike the United States, where the Federal Reserve already has rates at zero ” he said.
And Alexander said, also unlike the U.S., the Canadian banking system remains solid so a rate cut could prove effective.
“Credit is readily available and as a consequence if you lower interest rates it will have an impact on boosting domestic demand,” he said.
Fears of a recession ripped through financial markets last week as worries about sovereign debt in Europe continued and the U.S. Federal Reserve said there are “significant downside risks to the economic outlook.” The Toronto Stock market plunged to its lowest level since August 2010
However economist David Madani of Capital Economics noted that the risks of another recession in Canada have increased, but he didn’t think it would happen.
“Canada’s economic recovery is losing momentum, but we do not think, however, it has already entered a recession,” Madani said.
“As the global economic recovery slows further, and domestic consumption and housing investment shrink back to a more normal size next year, Canada’s economic performance will certainly suffer. Even then we do not forecast a recession, but clearly the chance of it happening has risen.”
In its September report the IMF said Canada has some room to put its plan to balance the books by 2014 on pause if the risks keep rising. But the lending agency stopped short of recommending any additional government spending.
Finance Minister Jim Flaherty has tossed aside any suggestions for additional spending and repeatedly said he was on track with a plan that will eliminate the deficit in four years.
“In Canada, the federal and provincial governments would have scope to provide additional stimulus to the economy in reaction to worsening domestic economic conditions, but it is more limited than it was in 2009,” Alexander said.
However he noted a government spending boost would be aimed more at dampening the effects of the external problems than addressing any difficulties at home.
“The main risks to the Canadian economy are outside of our jurisdiction,” he said. “Canada will be buffeted by global economic events and Canadian public policy cannot actually address the issues in Europe and the United States.”
The NDP have called on Flaherty to look at new infrastructure spending, something that he has been reluctant to consider.
“Right now, we don’t have here a debt crisis and yet, they’re trying to impose austerity measures,” NDP Finance critic Peggy Nash said Friday.
“We have a jobs crisis and we have a lack of demand and what this prime minister should be doing is investing in our economy. He should be creating jobs, that’s the way to keep our economy growing and from slipping into recession.
BMO deputy chief economist Doug Porter noted that even if Canada and the U.S. avoid another recession, Ottawa will fall well short of the estimates for growth in Flaherty’s last budget.
“Prime Minister Harper’s prescription for the world economy, calling for more austerity, is precisely the wrong medicine at this time,” Porter wrote in a note to clients.
“The selloff in stocks and rally in bonds are clearly sending that message.”