On January 20, the Bank of Canada downgraded its 2016 growth forecast for Canada from an already meagre 2 per cent to 1.4 per cent. “Highly uncertain” were the words chosen by the usually optimistic bank to describe the economic environment.
As the announcement was made, oil prices continued on a decline that has now exceeded 70 per cent, dragging down with it the Canadian dollar to a 13-year low. Stock markets have hardly fared better, with the S&P/TSX Composite Index falling 20 per cent below its September 2014 record – the technical definition of a bear market. Everywhere investors are growing wary, and capital projects are being withdrawn at a rapid pace. Columnists who previously saw glimmers of hope now admit that there are “few bright spots ahead” and that Canada’s economic prospects are “not so sunny”. The question on everyone’s mind is the same: where is the economy heading?
The Return of Inflation
At the time of writing, the loonie is hovering around 0.71 cents to the US dollar. This has driven up the cost of US imports, forcing a wide array of retailers (which are dependent on imports) to hike up the prices of consumer goods to compensate. The most frightening impact of this has been the dramatic increase in the cost of food – much of which is imported from the US or is priced in US dollars. The headline-grabbing $8 cauliflower is only a small part of the story. According to Statistics Canada, food prices have increased by 3.7 per cent in December from a year earlier – more than double the rate of inflation. Prices for produce in particular have risen by 11.5 per cent since 2014. A standard bag of groceries, which in 2011 would cost $59, now costs $70. This has disproportionately affected lower income Canadians, who spend a greater proportion of their earnings on necessities such as food. The result for many will be to swap out nutritious foods for less nutritious, cheaper alternatives. For others it will mean removing items from their grocery list altogether. This has already been observed with beef consumption. Beef is now so expensive that it has become a target of theft in supermarkets, after which it may be sold in the budding black market. According to a study, 38 per cent of Canadians said they have reduced or stopped eating beef in the past year – 62 per cent of whom cited financial reasons for their choice. What’s worse is that food prices are expected to rise again in the next year by 2-4 per cent, adding an extra $345 to the annual food bill. If the dollar continues its precipitous decline, which some analysts predict may bottom out at 59 cents to the US dollar, this burden will multiply further still.
Alberta is continuing to sputter as a result of the unending decline in oil prices. Hovering around $30(US) a barrel, oil has fallen to a 13-year low, prompting a recession for the second year running in the petro-dependent province. As noted in The Globe and Mail “Some now worry that Canada’s economic engine hasn’t just stalled, but may never again run the way it once did.” Indeed, the province, which once saw a steady influx of workers from across Canada, is now forced to watch as those same workers exit the province in search of employment elsewhere. And how can they be blamed? According to ATB Financial’s trade association, 100,000 workers directly and indirectly employed in the oil-and-gas sector lost their jobs in 2015. This has come as a direct result of spending cuts made by energy companies in the province. In fact, the Bank of Canada expects these companies to cut spending by a further 25 per cent in 2016, following a 40 per cent cut in spending in 2015. However, even this figure may prove to be optimistic if oil prices fail to stage an increase or even decline further. As noted in the Financial Times:
“[T]he economics of Alberta’s oil sands are highly unfavourable at today’s crude prices. The region is one of the world’s most expensive sources of oil, with new projects needing on average a Brent crude price of about $80 a barrel to be commercially viable, according to Rystad Energy, a consultancy. Brent was trading at about $31 a barrel on Monday. Oil prices have now fallen so far that some existing oil sands projects are not even covering their operating costs[…]”
Although Alberta’s woes are far from over, the human costs associated with oil’s collapse have already begun to mount. The suicide rate for Alberta rose 30 per cent in the first half of 2015, while deaths stemming from fentanyl abuse have more than doubled since 2014. Police chiefs have also warned that nearly all categories of crime are on the rise. The last time Alberta weathered a social and economic crisis of this magnitude was during the 1982-1983 provincial recession, when GDP contracted by 9.8 per cent. As noted by ATB Financial Chief Economist Todd Hirsch “This recession will be like being hit by a blunt object – it … won’t be as painful as [the 1982-1983 recession], but it will last for much longer. This will probably be the longest downturn since the 1980s.”
Mining & Manufacturing
Apart from oil, the global downturn has been no less unforgiving to other commodities. As noted in The Globe and Mail “The slowdown in China’s economy has wreaked havoc on the natural resources sector.” Indeed, minerals such as iron ore and metallurgical coal have seen their prices decline by more than 70 per cent over the past year. To make matters worse, the credit rating agency Moody’s has put more than a dozen major mining and energy companies in Canada on notice for a potential downgrade. This threatens to sharply increase corporate borrowing costs at a time when they are already being walloped by low prices. This in turn implies even more abandoned projects and increased layoffs across the industry. As noted by Moody’s “This is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies.” Not only mining companies, we may add, but the entire Canadian economy.
The manufacturing sector has once again proven that it too is not immune from the global downturn. Canada’s manufacturing sector contracted for the fifth consecutive month in December, all but dashing any remaining hopes of its vaunted revival. More worryingly, The RBC Canadian Manufacturing Purchasing Managers’ Index (PMI), a measure of manufacturing business conditions, fell to a seasonally adjusted 47.5 in December from 48.6 in November. A reading below 50 indicates contraction in the sector. The index fell short of that 50 threshold for nine months of the year in 2015. A reading this low has not been registered since the survey was first created in 2010. The belief that a low-dollar would lift manufacturing looked well on paper, but in practice it has proved miserably inaccurate. It has gone the same way as the rest of economy – downwards.
The Bank of Canada, which once hedged on a manufacturing revival, is only now beginning to realize how misguided their optimism was. This puts the bank in an uncomfortable position. By this point, all of its conventional monetary tools have been more or less exhausted. At 0.5 per cent, the overnight interest rate is already near zero - from where it can drop no further. The bank is well aware that a rate cut will have as little impact as the two carried out in 2015. At worst, it will stoke inflation and eat into Canadians' savings. The bank has for the first time openly flirted with the idea of quantitative easing and negative interest rates - two unconventional and largely untested forms of monetary policy. This is however a sign of desperation, and not a solution that most analysts would gamble on. Realizing this, the bank has refused to chart a course before a federal budget is tabled. In other words, the bank has signalled to Prime Minister Trudeau that the ball is in his court.
The Liberals are in no better position, however. The economy’s poor performance is weighing heavily on what was an already shaky fiscal plan. Trudeau has already abandoned an election pledge to keep deficits at no more than $10 billion annually. Some analysists are now forecasting deficits which may run higher than $20 billion to plug the budgetary hole. The man who less than a year ago said “In fact, it is Conservatives who run deficits, Liberals balance budgets,” is now deficit-spending’s largest advocate. This is not a sign of confidence, but of vacillation and deep uncertainty. Behind closed doors, Trudeau is gritting his teeth and praying that his plan will work. Analysts are not optimistic, however.
In an article dated January 25, CBC analyst Don Pittis remarked how “a multi-billion dollar infrastructure spending plan is like a snowball tossed into Lake Superior compared to what Canada has lost because of the 70 per cent plunge in the price of exported oil.” National Post columnist Andrew Coyne explained further:
“There’s a reason why [borrowing and spending] had fallen out of favour among economists prior to the financial crisis. The model on which it was based is a marvel of restrictive assumptions: an economy that is closed to trade, expectations about inflation that are essentially myopic, interest rates that are largely impervious to the demand for credit and investment that is largely impervious to interest rates. Relax these, as economists had in the intervening decades, and whatever stimulative effect a burst of government spending might be imagined to have is very quickly unwound, especially in an open economy such as Canada’s.”
In addition, running a deficit implies that a government is spending more than it is earning in revenue. That means the extra money must be borrowed. That being said, nothing comes for free under capitalism. Eventually, each and every dollar must be repaid – and with added interest! And just like under the darkest days of Jean Chretien, it will inevitably be the working class shouldered with that burden through austerity. Trudeau may have promised “sunny ways” upon being elected, but even the sun, if stared at too long, can turn you blind!
When Canada tumbled into recession for the first half of 2015, many hoped a recovery hung over the horizon. Many more hoped the economy could sink no deeper. But what seemed plausible back then has taken on the character of fantasy today. Some believed the recession in 2015 signalled a finale to the economic slump. Now it seems as though it was not a finale at all, but the overture to an even deeper collapse.
All of the factors which combined to drag Canada into recession in 2015 still exist. Only now, low oil prices and laggard investment have been joined by the spectre of inflation. Working Canadians are beginning to find themselves squeezed by stagnant wages on the one hand, and by an increase in the cost of living on the other. With the dust yet to settle since the last collapse, already are workers being faced with a new, more frightening development - stagflation.
Policymakers who yesterday saw glimmers of hope under every pebble are now forced to admit to reality: the economy is entering into a new crisis, and they do not know how to prevent it. All of the old formulas have proven their uselessness, and dead formulas like Keynesianism are being revived like zombies out of desperation. At best they can delay the crisis, but only at the expense of paving the way for even deeper crises down the line.
China, once the engine of the world economy, is now an anchor dragging the entire system down with it. Canada is not immune to this process. Without the market for its natural resources and manufactured goods, Canada cannot help but suffer the unending global economic storm. The bourgeois analysts are correct when they say that this is not a normal cyclical downturn. In fact, world capitalism today finds itself in a prolonged period of tortuous stagnation. In 2009 Canada weathered the economic storm better than other economies. It seems like Canada will also have a special position in 2016, but this time at the bottom. No amount of “sunny ways” can halt the cloudy days ahead. For that we need socialism.