Tories contemplate two grim letters

'Recession' and 'deficit' dominate caucus meeting in LÚvis

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The Gazette, Thursday, July 31, 2008

As the Conservatives hold their summer national caucus in LÚvis across from Quebec City, they should have two letters in mind - R&D.

Nope, not research and development, though that kind of R&D is key to our competitiveness and prosperity in a global economy. The two R&D words they should be watching out for, "recession" and "deficit," have a more ominous echo.

It now appears that Canada will avoid a mild recession, technically defined as two consecutive quarters of negative growth. We were heading down that path in the first quarter, following in the footsteps of a U.S. slowdown, with gross domestic product declining slightly in both February and March.

But our GDP rebounded by 0.4 per cent in April, and is on track to grow by about 1.2 per cent for the entire year. Not great. Nowhere near the three-per-cent growth rates that are the norm in a strong economy. But not a recession, either. Not technically or in any psychological sense.

The other leading economic indicators remain quite solid. Unemployment has edged up by two-tenths of a point in the last two months, but at 6.2 per cent nationally, the jobless rate remains at a 30-year low. In the last 12 months, the Canadian economy has created nearly 300,000 new jobs.

Some provinces are experiencing employment booms of historical proportions. Unemployment in Nova Scotia is 7.6 per cent, only a point and a tick higher than Ontario's at 6.7 per cent. Historically, spreads of four to five points are considered the norm between Ontario and the Maritimes.

For that matter, Quebec remains on a job roll. Unemployment of 7.2 per cent last month was down from 7.5 per cent in May. Quebec's jobless rate is within half a point of Ontario's, when the spread is usually two points in good times and four points in bad. (This is all you really need to know about Jean Charest's lead in the polls: He is taking and receiving credit for the best Quebec economy in three decades.)

At the premiers' conference in Quebec City this month, the premiers had an economic briefing from Bank of Canada Governor Mark Carney, who predicted growth of 1.5 per cent for the year. The only worrisome point was his forecast of four-per-cent inflation in the near term, and the current inflation rate of 3.1 per cent is, indeed, outside the central bank's two-per-cent target.

So, no recession. And Carney's outlook is right in line with this week's White House forecast of 1.6 per cent growth in the U.S. this year, with a prediction of 2.2 per cent in 2009. No recession in our biggest market either. The recent one-per-cent decline in our exports is at least as attributable to exchange rate parity as to a flat line in U.S. consumer demand.

OK - no "R", but what about the dreaded "D" word? On this front, the trailing data aren't as reassuring, though the outlook should follow the other leading indicators slightly to the upside.

In the first two months of the current federal fiscal year, Ottawa incurred a deficit of $500 million. Welcome to the new federal movie - Honey, I Shrunk the Surplus.

It's explained by three more letters - GST. The Conservatives' second one-point cut in the goods-and-services tax last fall took $6 billion out of the federal coffers - a big number even with booming oil royalties and corporate tax receipts.

Stephen Harper's political problem is that a deficit is no longer an acceptable political outcome. Not since it was eliminated by the Liberals in 1997, in the wake of Paul Martin's famous pledge to balance the books, "come hell or high water."

If the fiscal framework were to fall back into a deficit on the Conservatives' watch, it would reflect very badly on their competence, a core attribute of governance, and would give the Liberals a sword for the next campaign.

So the "D" word definitely bears watching. The virtuous cycle of the last decade has seen the federal debt fall from 40 to 25 per cent of GDP, with a paydown of about $100 billion of debt, to $467 billion. The wireless telecom auction windfall of $4 billion gives Harper the margin to pay it down some more.

Compare the Canadian fiscal framework with that of the U.S., where the White House just revised its deficit forecast for the fiscal year beginning in October to nearly $500 billion. Quite a present for George W. Bush to leave for his successor.

And the U.S. federal debt of $6 trillion when the Bush assumed office in 2001, will be $10 trillion by the time he leaves next January. And these are Republican numbers. Yikes.

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