Government’s big spending plans will slow down sluggish growth even further, says Leading Economic Indicator author Philip Cross
OTTAWA, June 23, 2016 – Canada’s strong economic start to 2016 came to a screeching halt at the end of the spring, thanks to a sluggish manufacturing sector and a decline in business investment.
The Macdonald-Laurier Institute’s Leading Economic Indicator (LEI), which is designed to monitor the underlying cyclical health of the Canadian economy, is signaling continued slow growth.
To read the full commentary accompanying the release of the LEI, click here.
Ottawa’s prescription for shaking the economy out of its doldrums – a massive program of government spending – won’t work either, says MLI Senior Fellow Philip Cross.
The justification for going into deficit in the most recent budget was that a shortfall in demand in the Canadian economy requires more government spending.
But the problem, says Cross, isn’t one of demand but of resource allocation.
Shifting resources from the energy industry to other sectors is a process that will take up to 2019, according to the Bank of Canada. Deficit spending can do little to alter that outcome. Indeed, policies that deter business investment, such as failing to balance budgets, will slow down this adjustment process.
A significant issue is that manufacturing activity has been very slow to respond to lower oil prices, the devaluation of the Canadian dollar, and steady growth in the United States, all factors that historically have boosted manufacturing in Canada. Instead, manufacturing output was essentially unchanged (+0.1 percent) between the fourth quarter of 2014 and the first quarter of 2016.
Quarterly business investment fell 3.7 percent, its sixth consecutive decline. In its annual survey of business investment plans, Statistics Canada found that firms in the business sector plan to cut capital spending another 6.5 percent in 2016, on the heels of a 10.5 percent drop in 2015.
Oil prices, meanwhile, plumbed their lowest quarterly level since 2002, while household spending contributed to growth in the first quarter.
The index is available on Bloomberg and is intended for journalists and analysts who follow the macro performance of the Canadian economy. Quarterly economic analyses by Cross, based on the results of the indicator, will appear on the MLI website.
Philip Cross is a Senior Fellow with the Macdonald-Laurier Institute. He previously served as the Chief Economic Analyst for Statistics Canada, part of a 36-year career with the agency.
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