Charest has his eye on economic, not polling, numbers

The premier will call an election today before the economy grows worse

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The Gazette, Wednesday, November 5, 2008

If you really want to know why Jean Charest is calling an election today, it's not so much because his of poll numbers, it's because of the economic numbers.

Charest's poll numbers are good, but not in slam-dunk territory for a majority in the legislature. Quebec's economic numbers are currently very good, but they are trailing indicators and they won't take long to catch up to the new reality.

Quebec's economy is dependent on our two largest customers, the United States and Ontario, which together account for about 40 per cent of provincial output. Quebec's exports to the U.S. are 20 per cent of the economy, and Ontario's exports to the U.S. account for one third of its provincial output, nearly half of that in automotive trade.

In that sense, what's good for Ontario is good for Quebec, and Ontario is not in a good place right now. Its unemployment rate of 6.4 per cent is slightly above the national average of 6.1 per cent. The great motor of the Canadian economy is lagging, not leading. Ontario has already forecast a deficit of $500 million in the current fiscal year. And just this week, for the first time ever, it was told to expect an equalization cheque of $350 million from Ottawa. Ontario is now a have-not province. Yikes.

But it's the U.S. economic data that's really scary. In the third quarter, the U.S. economy recorded negative growth of 0.3 per cent, the first negative quarter since the last recession of 1990-91. So, the U.S. is now officially half way toward the next recession, defined as two consecutive quarters of negative growth. Welcome to the White House, Mr. Obama.

Unlike the Canadian economy, which is built on trade, the U.S. economy relies above all on domestic consumption, which accounts for about 80 per cent of economic activity.

And American consumption was down 3.1 per cent in the third quarter, the steepest decline in nearly 30 years. Spending on durable goods - big-ticket items like cars, fridges and DVD players - fell by a frightening 14 per cent. As for the housing sector, it is working through a surplus of stock because of Americans losing homes they couldn't afford. It's the shakeout from the sub-prime mortgage fiasco. Building permits in the U.S. are down six per cent, and the manufacturing index, at 38.9, is well below the level of 50 which represents contraction. Half a dozen Dow 30 companies have announced cumulative layoffs in the hundreds of thousands, and some 750,000 jobs have been lost in the U.S. this year.

It isn't hard to figure out what this means for the Canadian trading economy, including Quebec's. As America's largest trading partner, Canada accounts for 16.5 per cent of all U.S. imports, and the U.S. accounts for at least 80 per cent of our exports.

Just when needed most, neither the American people nor the U.S. government really have the margin to spend their way out of an economic slowdown.

As Paul Krugman, the new Nobel laureate in economics, noted in his New York Times column the other day, the historic U.S. savings rate of 10 per cent is now only two per cent, and consumer debt is now equivalent to 98 per cent of GDP.

Normally, the Federal Reserve could stimulate spending by reducing interest rates, but its overnight rate of one per cent is already pretty close to zero. And if Americans, of all people, stop spending, then there's a huge crisis of confidence out there. Deflation, the cost of goods actually declining, is a possibility.

And on the government side, federal spending is now growing at a frightening rate of nearly 14 per cent. The Bush administration just finished the fiscal year with a $500-billion deficit, and by the time its leaves office in January, will have added at least $3 trillion to the U.S. federal debt. And that 's before the $700-billion bailout of Wall St., which might end up costing more than $1 trillion.

And then there's the stock market, which staged an Obama rally into yesterday 's presidential election. But in the black months of September and October, there were days when the Dow lost more than $1 trillion of market capitalization, while the TSX had sessions where it racked up $100 billion losses. Not only have equity markets cratered, credit markets have dried up, a very bad sign for new investment and new jobs.

So here is Jean Charest looking at all these numbers, and thinking he'd better go now, while Quebec 's unemployment rate is only 7.3 per cent, just slightly above the national average, but well below historical spreads. That he'd better go before what happened in the Quebec forestry last year happens across manufacturing next year. That he'd better go while the satisfaction level with his government is high, and before it plummets in a recession.

While the economic numbers point down, and Charest's poll number point up, they are actually both pointing him in the same direction - to an election.

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