Economic storm clouds threaten to rain on Harper

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The Gazette, Monday, August 23, 2010

Economic growth is slowing in Canada, while the cost of living is on the rise. Should this become a trend, flat growth and higher prices, it wouldn't be good for Stephen Harper's political health. His prospects for re-election next spring, his preferred time to face the voters, depend on a continuing recovery.

But the inflation numbers, out on Friday, weren't good. The consumer price index rose 1.8 per cent in July compared to a year ago. Energy prices were up 7.9 per cent, while within that segment, electricity prices rose 9.8 per cent, with gasoline prices up 4.8 per cent. Overall, seven of the eight major components in the CPI rose in the last year. In the last month alone, the cost of shelter was up 2.9 per cent, while transportation costs were up 2.7 per cent.

These numbers reflect the impact of the new harmonized sales tax, which took effect in July in Ontario and British Columbia. The HST effect was most visible in Ontario where, as StatsCan reported Friday, "consumer prices rose 2.9 per cent, after increasing 1.6 per cent in June." In Quebec, by contrast, prices increased only 0.6 per cent in July.

The combined federal-provincial HST in Ontario is now 13 per cent, and the blowback over it puts incumbent Premier Dalton McGuinty in an uncomfortable position as he looks toward a fixed date election in October of next year. In B.C., three-term Premier Gordon Campbell and his Liberals were already trailing the NDP by nearly 25 points in the polls even before introduction of the HST. A representative of the B.C. government was trying to make the case the other day that the 12-per-cent HST was a federal tax. Good luck with that.

In Quebec, the 7.5 QST is a compound tax on top of the 5 per cent GST. So for every $100 purchase, the $5 GST leads to $7.87 of QST. As an HST, the Quebec consumption tax is very close to the 13 per cent in Ontario, but it's been with us so long we're sort of used to it.

Voters hate new consumption taxes because they are so visible. Twenty years ago, the fury over the GST, combined with the 1990-91 recession, drove Brian Mulroney's approval ratings into the basement.

The good news, though not for McGuinty and Campbell, is that the Bank of Canada's core index rate is 1.6 per cent, still well within the central bank's two per cent target rate for inflation. This is because the bank's core rate excludes consumption taxes like the HST.

Moreover, the unadjusted CPI number of 1.8 per cent is below a consensus forecast of a two per cent jump in inflation in July, precisely because of the predictable effect of the HST in Ontario and B.C., not to mention a two-point increase in Nova Scotia's HST. As BMO deputy chief economist Doug Porter noted on Friday: "We were pretty surprised by how moderate the increases were in the circumstances."

Where there is cause for concern, or should be, is on the economic growth side. After two very strong quarters, with five per cent growth in the last trimester of 2009 and six per cent in the first three months of this year, Canada's GDP increased only 0.1 per cent in May, and BMO has revised its forecast for the second quarter down to 2.3 per cent. In June, factory sales were up again, but by only 0.1 per cent to $44.8 billion.

And here's an interesting stat: Home sales fell 6.8 per cent in July, while new home listings fell by 7.2 per cent. This might actually signal a welcome breather in the Canadian housing market, driven by the availability of cheap mortgages. We're not in bubble territory, but the average price for a home in Canada last month was $330,350.

Finally, as an exporting nation, we have to be concerned about a trade deficit that nearly doubled to $1.3 billion in June from $695 million in May, while our surplus with the U.S. remained about the same at $3.3 billion.

All these numbers affect the most important stat of all -- unemployment rate, steady at eight per cent last month. Harper's job depends on all those other jobs.

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