As the economy slows down, should austerity pick up speed?

Statistics Canada

Canada’s GDP numbers for November came out this morning, and it was a rude awakening. The economy slowed down unexpectedly in November, with output dipping 0.1 per cent, as opposed to the consensus forecast of 0.2 per cent growth. “While it initially appeared that the Canadian economy smoothly decelerated late last year, it now looks like Canada stumbled as it approached the 2011 finish line,” CIBC quipped in a note.

Dragging down overall output was a 2.5 per cent drop in oil and gas extraction activity, possibly due to low oil and gas prices and softening demand for exports. Notably, construction in both the residential and non-residential sector was down 0.3 per cent.

Statistics Canada

The November slowdown is expected to bring down quarterly growth from a projected two per cent annualized expansion. Recession–defined by economists as two consecutive quarters of negative growth–isn’t necessarily upon us. But with Europe teetering on the brink of fiscal disaster, global demand cooling, and the Canadian housing market possibly due for a downturn–which could shave as much as one per cent off of GDP, according to some estimates–is it really time for the Harper government to pull the breaks on public spending?

Another concern is that, with rates already at record lows, there’s little the Bank of Canada can do to soften the impact of deficit cuts with expansionary monetary policy. As Stephen Gordon noted yesterday, there are steep costs associated with introducing austerity at the wrong point of the business cycle.




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As the economy slows down, should austerity pick up speed?

  1. Only if you want it to crash altogether.

  2. Canada’s GDP for 2011 is $1.75 trillion.  If the government were to cut $5 billion that would represent 0.28% of Canada’s GDP and some of that would be offset potentially by increased investment and lower interest rates on debt repayment.  In the context of a $30 billion deficit and a (barely) growing economy, the cuts make sense.

    • Increased investment? How so? As you say, this is deficit money, so it’s not like anybody is getting taxed less any time soon for it.  If anything, it means at least 0.28% *lower* investment, and that’s if you discount any knock-on effects, such as families losing their income earner so having to draw on what little savings they have or, even worse, having to go on welfare, thus causing that 5 billion cut to be somewhat less than 5 billion anyway.

      With an export based economy and a massive slowing globally, austerity measures are essentially cutting gas to the prop just as we hit a headwind.

      • There is a certain kind of recession in which nobody wants to invest in a country (Greece, Italy) which is insolvent.  It’s logical that a country with its fiscal house in order would attract more investment, and by investment I mean the “normal person” definition – private sector dollars – not the socialist definition that you are using – more statist spending.

        If the savings come in the form of “layoffs” those workers get healthy buyouts and many are near retirement age anyway – that’s what happened when Martin did cuts. They’ll still buy groceries, some will start businesses, others will enjoy early retirement on generous public sector pensions.  

        The world economy is growing, not slowing, as is Canada’s economy, which has more people working now than before the 2008/09 recession.  Federal government employment and spending has increased substantially in a short time and it’s reasonable to make modest cuts.

        A year ago, when the employment rate was lower than pre-recession levels, Prof. Gordon was still calling for stimulus spending on borrowed dollars.  I’ll take what he says with a grain of salt.

        • The distance between us and Greece is so far as to make your comparison worthless.

          Or are you seriously arguing that investors will look at a 30 billion dollar deficit with a 175 trillion dollar economy as too risky, but a 25 billion dollar deficit with the same economy makes it a go?

          Really?

          I’d suggest that any investor scared off by Canada’s 30 billion dollar deficit is going to be no less scared by a 25 billion dollar deficit.

          • Greece’s public debt is 116% of GDP, Canada’s is 84%.  Not really that far at all.  You can suggest anything you like but unless you have facts and/or a coherent theory (note how my comments are laden with both, and yours aren’t) you’re just wanking with an opinion.  Besides, it’s a comment section, not a stalking section – go annoy someone else.

          • So you can’t debate the point then? That’s what I’m getting from your silly “stalking” comment.

            When you come here to comment, there’s a reply button beneath each comment you make.

            That’s so people can call us on stuff, incase you missed it.

            If you want your opinion to exist in a vacumn, don’t comment on public sites.

            Sheeesh.

          • I’m questioning your coherence.
            Your supposed “coherent theory” is that investors not scared off by a 25 billion dollar deficit will be scared off by a 30 billion dollar deficit. This does not seem reasonable.  Perhaps you have an answer to this criticism, or perhaps it’s simply a statement of faith. Either way, it would be good to know.

            Your second “coherent theory” that I didn’t even bother addressing because it’s so patently ridiculous I thought even you knew you were blowing smoke, is that every worker laid off is going to have a generous pension plan in place.

            As to your facts; the global economy as a whole may be growing (albeit barely), but the economies of Canada’s primary trading partners have taken a header. And while the general numbers of employment may be up, the quality of those jobs is an issue. So while you may have “laden” your comment with facts, they’re obviously a selective application thereof.

            Finally, as Phil points out, this is a comment forum. If you didn’t want replies, one would assume you’d simply start a blog and shut the comments off. 

            Personally, I like to post here because sometimes I’m shown to be wrong — and that’s when I’ve learned something.  And very, very rarely, I’ll come across a poster who’s willing to acknowledge if they’re wrong.. and that’s even better, because then I’ve taught something and helped out.

  3. Oh whatever can we do?  Hey I know!  Let’s claw back some pension benefits from low-income seniors.

    “Macleans.”  Its time we put these obnoxious cork suckers out of their misery.

  4. Terence Trent D’Arcy McGee sounds like a government economist.

    • LOL on steroids.

  5. Canada has something which the United States and Europe don’t have, which is business investment.

    GDP = government spending + individual consumption + business investment + net exports.

    As long as business investment is relatively robust, which it is, then the government can restrain spending.  

    As we ween ourselves off of government stimulus, as the handoff to private sector growth and investment led growth occurs,  GDP growth will necessarily be a bit weak.

    But this is just withdrawal from the crisis government stimulus “drug”, which is necessary return from economic crisis mode to normal economic growth.

    • Pink unicorns….all the way down.

  6. Low oil prices? I must have slept through that one.

  7. Boy, that GST cut just keeps coming back to haunt doesn’t it?

    Basically, if Stephen Gordon and most of the economists in Canada are right, the structural deficit is essentially the result of making things like yachts, new houses, maids, poolboys, gardners etc. cheaper for the more affluent in society, since since they’re the ones buying these things, and these things account for 80% of the GST collected.

    At a time when the gap between the rich and the poor is greater than ever.

    And now we’re cutting back on pensions for the poor?

    Good grief, what kind of people support this crap?

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