December’s ugly job numbers took a lot of economists by surprise—and not just because the nearly 46,000 job losses occurred more or less across the board. “Digging beneath the ugly headline reveals more ugliness,” wrote Doug Porter, BMO’s chief economist, in a note. “Full-time jobs tumbled 60,000, and thus barely managed to rise at all last year.”
As a result, Canada’s previous unemployment rate of 6.9 per cent shot back up to 7.2 per cent, putting it above the U.S. jobless rate (which fell to 6.7 per cent in December from 7 per cent before) for the first time since the financial crisis. That in itself is probably meaningless since the way the two jobless figures are calculated is quite different. (As a rule of thumb, economists say, it’s probably best to subtract a single percentage point from the Canadian figure before trying to compare it with its American counterpart). Nevertheless, it’s safe to say that Canada, lauded for its performance throughout the recession, is now on a different trajectory than its southern neighbour.
How we got here isn’t complicated. When the U.S. fell into the abyss in 2008, Canada lowered interest rates in lockstep with the U.S. Fed. That, in turn, fueled the housing boom and boosted overall consumer spending, helping to make us the envy of the world. But now there are concerns that both housing prices and household debt have reached unsustainable levels, meaning Canadian consumers can no longer be counted on to carry the weight of the economy on their shoulders.
The hope now is that businesses will take over the heavy lifting by resuming investment—building new factories, buying new equipment, hiring workers—while the strengthening U.S. economy gives the country a lift by boosting demand for Canadian exports. The falling loonie, now below 92 cents U.S. following the dismal job numbers, will help in this regard by making Canadian exports cheaper.
It’s not a bad outcome, if it happens. But it hasn’t yet. Whereas Finance Minister Jim Flaherty found it relatively easy to influence the housing market by tinkering with mortgage insurance rules, he has zero control over wallets of American consumers. Nor does he have much of a say in the global commodity prices that drive Canada’s vaunted resource sector—the other growth engine Ottawa is banking on.
That has prompted some to muse whether Canadian governments should take a more active role in the face of increasingly bleak economic data. Toronto Star columnist Thomas Walkom recently raised the idea of government investment in badly needed public infrastructure—effectively another round of stimulus spending. A similar proposal has been put forward by Larry Summers, a Harvard economist and former U.S. Treasury Secretary, when it comes to the U.S. economy. Arguing that the U.S. faces “secular stagnation,” Summers says a continued focus on monetary stimulus will only create the illusion of growth by fueling “substantial financial bubbles and dangerous buildups in leverage.” Instead, Summers asks, why not take advantage of those same low interest rates to build things that will also increase the economy’s long-term potential?
Politically-speaking, these aren’t popular ideas. The last thing we need after an extended global slump brought on by profligacy is more spending, the thinking goes. Indeed, most governments are in a hurry to balance the books to demonstrate their fiscal bonafides. Thanks to the debt ceiling battles, the U.S. government is now slashing spending at an unprecedented rate. Meanwhile, Flaherty has predicted a budget surplus by 2015.
Economists, on the other hand, are divided on the wisdom of so much belt-tightening so soon. Those who believe fiscal responsibility makes businesses feel better about investing, and consumers more inclined to spend, argue the fact that the U.S. economy grew by 2.6 per cent through the first three quarters of 2013, and 4.1 per cent in the fourth quarter, is evidence austerity works. Others argue the U.S. recovery was merely strong enough to withstand an ill-timed experiment.
Canada, of course, is also conducting its own real-time economic experiment. But, unlike the U.S., we may have picked an even riskier time to do it. Canada’s economy grew by a barely-there 1.6 per cent last year, businesses are shedding jobs and policy-makers are still grappling with the possibility of a housing bubble. “We must stay focused on our plan to grow the economy and keep taxes low to create the environment where job creation can flourish,” Flaherty said in a statement following the release of December’s brutal job numbers. Yet, other than another interest rate cut by the Bank of Canada (which has yet to yield the desired result), it appears Ottawa’s “plan” remains remarkably similar to the rest of the country’s—and that’s to simply wait and see what happens next.