Canadian policy makers have been saying for months that the country’s low-speed economy will kick into higher gear soon as exports and business spending strengthen.
But a Canadian think tank is urging the country’s economic policy chieftains to accept the likelihood that Canada’s slow-growth recovery will continue for the next few years.
Instead of trying to spur growth through monetary or fiscal policy, the Canadian government should focus on helping workers sidelined by economic stagnation, the market-oriented C.D. Howe Institute said in a report released Wednesday.
The think tank’s report comes two weeks after the Bank of Canada acknowledged “serial disappointment” in the global economy, but reaffirmed its expectations global growth will accelerate.
That acceleration is critical for Canada. Its households are burdened with high levels of debt incurred as housing prices surged due to rock-bottom interest rates, and its governments are generally cutting back spending in order to bring their books back to balance.
That means the export sector and Canadian businesses have to take the growth baton from consumers and governments.
When that happens is something beyond the control of the Bank of Canada or the federal government, the C.D. Howe report said.
“An investment revival will require a return of corporate confidence, while a rally in Canadian exports will depend on a strong and sustained foreign recovery,” it noted.
Lower interest rates won’t likely stimulate growth in business spending, since it’s uncertainty, rather than interest rates, that’s holding back their spending, it said.
In addition, lower rates isn’t a suitable response due to the problems associated with very low interest rates–an over-emphasis on particular investments, such as residential housing, a tendency for investors to adopt excessively risky positions in pursuit of higher yields and easier borrowing conditions for over-indebted governments.
Indeed, those problems “may soon present the Bank of Canada with a compelling case for rate increases,” according to the report.
Canadian authorities are in a better position to opt for looser stimulative policy than their counterparts in other advanced economies, it said, but there are compelling arguments against tilting in that direction. One is that fiscal policy is “an ineffective pro-growth policy when the economy is not experiencing a sudden collapse of aggregate demand.”
“Another is the longer-term budgetary challenges that Canadian governments will face over the next few decades as a result of population aging,” the think tank said.
But government can play a role in addressing the damage slow growth is inflicting on the country’s labor force, it said.
“[The] federal and provincial policymakers need to focus less on the standard tools of conventional macroeconomic stabilization – monetary and fiscal policies – and instead focus their attentions on labor-market policies that, if designed well, could alleviate the burden currently being experienced by the unemployed and underemployed,” it said.
C.D. Howe identified three types of policies governments could embrace: increasing income support to unemployed workers; improving labor-market mobility; and enhancing training and skills acquisition.
Canadaâ€™s Economy May Be Stuck in Low Gear for Next Few Years - Canada Real Time - WSJ (external - login to view)