What are friends for if you can’t count on them in your time of need? So take heart, you slumping, sputtering, sluggish world—Canada has your back.
At least that’s the prevailing narrative everywhere you turn right now. From digital news site Quartz, which declared Justin Trudeau to be “the best hope for the global economy,” to the Wall Street Journal and the Financial Times with their slightly more restrained analysis, the media has credited the Trudeau government for leading an economically challenged world away from austerity and into the sunny ways of fiscal stimulus.
If that sounds like a message crafted by the government’s own PR squad, it more or less is. Since Finance Minister Bill Morneau released the Liberals’ first post-election budget last month—which repeatedly stated his government was answering the stimulus call of the IMF, the OECD and the G20—the minister and his boss have keenly cast themselves in the role of deficit-spending crusaders.
That the theme has been taken up with such gusto internationally, though, marks only the latest star turn for Canada’s economy in the eyes of the world. Whether Canada was being fêted for escaping the worst of the financial crisis, or for its fiscal prudence during the European debt crisis and the squabbles over America’s debt ceiling that followed, the idea Canada has the fix for what ails the world has proven enduringly enticing—even if the analysis behind those belief is built on a dubious reading of history.
Canada, it seems, is the world’s economic Rorschach test. Stare at the splotches of ink (red or black, depending on the moment) for long enough, and you can see what you want.
Right now, what the IMF sees is a world where ultra-low interest rates are no longer stimulating demand. With central banks quickly running out of ammo amid worries that the global economy is on the verge of another downturn, the IMF last month called on the world’s major economies—at least those that have the available “fiscal space”—to embark on a bold plan to boost growth using the fiscal tools at their disposal. The IMF didn’t actually come out and say “run big deficits indefinitely into the future,” but that’s how Morneau interpreted it.
Let’s put aside, for a moment, the fact that Canada’s economy is already growing, even if that growth is stunted. Or that more public investment will crowd out the private sector. There’s a very real possibility that Ottawa’s stimulus efforts, if it is not matched by other countries, will actually work against Canada’s economy at a time when it’s supposed to be an example to the world.
That was a point economist Ted Carmichael made in an insightful blog post last week. Canada is a small open economy—meaning it relies heavily on trade—and has a floating exchange rate. As the government increases investment, he noted, it might juice the economy in the short term, but that will also lead the market to expect an uptick in inflation and anticipate higher interest rates from the Bank of Canada. That, in turn, would put upward pressure on the loonie.
Carmichael points out that process has already begun, with the Canadian dollar rising 15 per cent since January and the Bank of Canada warning the increase may hamper the country’s export-led recovery. True, the stronger loonie can also be traced to the decision by the U.S. Federal Reserve to delay its next interest rate hike—which has led the U.S. dollar to fall—but it shows the danger in Canada’s go-it-alone strategy. When all is said and done, Morneau’s plan to put Canada deeper into debt to boost growth may not result in any additional growth, just a whole lot more debt.
That counter-narrative isn’t nearly as much fun as the idea that Canada will lead the world by stimulus-example to a brighter future. But the world’s occasional fixation on this country’s economy and policies has always skewed to the overly simplistic, reflecting whatever larger political obsession was out there.
For instance, in the rush to untangle the causes of the financial crisis—which brought down many of the world’s largest financial institutions—countless reports and studies turned to Canada’s “boring” approach to regulating banks. But having healthy banks is not what enabled Canada to skirt the worst of the crisis. Instead, it was the quick resurgence in oil prices and the mad rush by Canadians to buy and renovate homes in response to ultra-low interest rates. This gave the economy its boost—and subsequently gave us banks that are far more gargantuan relative to the economy than any of America’s too-big-to-fail institutions ever were.
Likewise it was only five years ago, at peak-debt crisis, that observers in the U.S. and Europe were enamoured by Canada’s transformation from 1990s fiscal basket case into the G7 nation with the lowest debt-to-GDP ratio. It was called the “Maple Leaf Miracle,” and much of the focus in that narrative was on the deep spending cuts that brought Canada’s massive deficits under control. In reality, as Maclean’s Ottawa bureau chief John Geddes explained at the time, the cuts to government jobs were far less severe than the world’s deficit hawks later made them out to be. Instead, Canada benefited mostly from a strong U.S. economy and the start of the oil boom, both of which brought tax windfalls to Ottawa.
The Harper government eagerly cultivated those narratives after the financial crisis. In the same way, the Trudeau government is now capitalizing on the attention given to its deficit spending plans to fend off any criticism of its fiscal strategy. “I heard the Financial Times call us a glimmer of hope. I heard the Wall Street Journal say that we are doing the right things on the IMF plan to grow the economy,” Morneau said this week during Question Period. “We are going to make a real difference for Canadians today and tomorrow with the kind of fiscal measures that will grow our economy for the long run.”
Economists are still out on that claim. Stay tuned, world.
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