The Economist says that economic expansions, like the decade-long one that we have enjoyed, “are most often killed off by rising interest rates or financial crashes—surprises that cause economy-wide demand for goods and services to fall. Rarer is the supply-side recession in which economies are deprived of their productive capacity. Not since the oil-price shocks of the 1970s has there been a global downturn that can be attributed primarily to supply. Yet if a worldwide slump happens in 2020 it may fall into that category – because it will have been caused primarily by the trade barriers erected between China and America … [and] … History offers little guidance as to what a trade-war recession looks like, or what the right policy response is. Nor, it seems, is economic theory much use. It predicts that tariffs, like all supply-side disruptions, will be inflationary. In fact the most visible effects of the trade war to date have been declining business confidence, a global manufacturing slump and tepid investment. Inflation expectations have been falling, as have long-term interest rates. That makes the slowdown look more normal.” It may well be that those “most visible effects” were being felt in Canada in the autumn and that is why our Canadian economy began to shed jobs. The bystanders may be the first to feel the pain of a global recession, before the protagonists: America and China.
“An upside of this,” the article says, “is that the right policy response becomes clearer: economies will need stimulus. America’s Federal Reserve has already cut interest rates and the European Central Bank (ECB) has restarted quantitative easing (QE), while Chinese policymakers have eased both monetary and fiscal policy. Yet rich-world central banks are running up against limits on monetary policy. Interest rates in Europe are already negative and the ECB cannot buy bonds for ever without hitting legal constraints. The Fed does not have much more room to cut rates.” The Bank of Canada has some room to cut rates, but not too much I think before we become very like the ECB.
The Economist says that “Turnover among top global officials is a further source of uncertainty. Christine Lagarde is taking over at the ECB. Though she shares the doveishness of her predecessor, Mario Draghi, she will struggle to hold together the central bank’s governing council as its northern members become ever more agitated by negative rates and bond-buying. Britain is due a new Bank of England governor to replace Mark Carney. Kristalina Georgieva, a senior World Bank official, has replaced Ms Lagarde at the helm of the IMF.” Here in Canada, “The Bank of Canada says Stephen Poloz won’t seek a second term as governor when his seven years in the job expire” in 2020. That also adds to our domestic uncertainty.
“A recession is not inevitable,” The Economist suggests because “In many countries, especially America, healthy labour markets and confident consumers are bulwarks against one,” but that may no longer be the case in Canada as some recent reports say. But the main article says the “defences are beginning to show cracks. And there is a worst-case scenario that should worry central bankers everywhere: that the trade war turns inflationary after all, perhaps compounded by rising oil prices, even as growth slows. The world economy is teetering on the brink of an unfamiliar type of downturn, with central banks in a period of flux. It is an uncomfortable position to be in.”
While the well regarded Conference Board of Canada predicts that Canada will not slip into a recession, my personal sense, from chats with friends and family, from being out and about in the shops, and from news reports is that ordinary Canadians, workers and consumers, do not share the Board‘s optimism. I think Canadians have too much personal debt and they cannot afford to take on any more. If Canadians stop consuming then I cannot see how the economy can keep growing. The national and provincial governments are almost all running large deficits or trying to recover from serious overspending just when they might want to borrow to provide some economic stimulus. Increasing taxes and putting taxes on taxes, as opponents to the Canadian carbon tax schemes suggest is happening, cannot help.
Even the Liberal friendly Star‘s headline, a few days ago, said that “More Canadians are filing for insolvency than we’ve seen since the financial crisis,” and it asked: “What’s going on?” The answer, it still seems to me, is simple. Back in October, too many Canadians decided, as did Maclean’s Paul Wells, that when the choice was one party that promised (but has failed) to do something about climate change while the other promised to do something about the economy we should take a risk and vote for climate action. I said he was wrong; I stick by that. I think millions of Canadians are going to be hurt, financially, this year … so much, I guess, that the Liberal Party might even ditch Justin Trudeau (and Bill Morneau and Catherina McKenna, too) and go to the polls with a newly-minted and newly self-proclaimed fiscally conservative Chrystia Freeland at the helm. She may display all the fiscal zeal of the convert but, traditionally, poll after poll shows that Canadians trust real Conservatives to manage the economy when the straits are dire.
I sincerely hope that I am wrong and that Finance Minister Bill Morneau, the Conference Board and Paul Wells are right and that we are going see slower growth but not a real recession. But economic booms and busts do seem to come in cycles, and a ten-year expansion, which is what we’ve had after the Great Recession of 2008, is about as long as most last.