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Avoiding a chicken little budget

By Kevin Gaudet
web posted January 26, 2009

Any Canadian who has been listening to politicians and spin doctors lately would likely believe Canada’s entire economy was teetering on edge.  In truth, calm should be the order of the day, not panic.  The sky is not falling.  In fact, it is not even close to falling.  Granted, an economic acorn or two have fallen in Canada.  These acorns have driven some to scurry around like Chicken Little stirring up a frenzy of calls for massive government intervention.  Yet, we must remember a moral of Chicken Little: when one blindly buys into hysteria, the consequences can be dire. 

Just how hysterical has the rhetoric become?  A sober look at some of Canada’s economic fundamentals reveals panic and over-reaction.

The most hysterical have been comparing our current economic down-turn to ‘the Great Depression’ when in the early 1930s unemployment in Canada peaked at 27 percent and the market crash wiped-out almost 100 percent of savings.

Others have compared today to the oil crisis and recession of the 1980s when unemployment rose from 7 to 13 percent.  Some have even compared it to when the tech bubble burst in the 1990s, again boosting unemployment from 7 to 12 percent. 

The current reality is much different.

From February 2008 through December 2008, unemployment in Canada has grown only slightly from a 33 year low of 5.8 percent to 6.6 percent, and is predicted to top out around 8 percent in 2009.  While clearly this is moving in the wrong direction, it is nothing like ‘the Great Depression.’ 

And while equities have fallen, they have not been wiped-out.  From January 2007 to December 2008 Canada’s equity markets have outperformed the United States S&P 500. 

Canada’s banking system is also stronger than others and still offers important access to capital for business and individuals.  According to the Bank of Canada, less than half of businesses are reporting tighter access to credit.  This number is up year-over-year but is roughly the same as it was in 2001-02, after the financial hiccup subsequent to 9/11.  Canada’s banks’ strengths are due, in part, to bank leverage ratios being more cautious in Canada than the United States or the United Kingdom.

To be sure, Canada’s Gross Domestic Product will not come close to the growth rate private sector forecasters had originally predicted.  The economy will experience a technical recession – two consecutive quarters of negative growth – in the last three months of 2008 and the first three months of 2009.  However, this recession is expected to be brief and flirting with zero growth.  Zero growth is not ideal, but it isn’t the recession of the 1980s either.  Nor will it be like the 43 percent reduction in gross national product seen from 1929 to 1933.  In fact, dueling forecasts even indicate a late-year recovery may generate positive GDP growth, albeit small, for 2009.

It is unclear whether or not they believed what they said, but during the past federal election every single party leader was adamant they would balance the next federal budget.  The Prime Minister argued that Canada’s economic fundamentals were strong.  His government’s economic update, only two months ago, stated that the government would make tough, pragmatic choices to protect the future by maintaining strong financial management.  Little has changed since then, other than the political frenzy having intensified.  The numbers confirm this.  Credit access, unemployment, and Gross Domestic Product (GDP) are all off, but none substantially.

Canada is better-off than many other countries and not nearly as vulnerable as too many are suggesting.  The government should not over-react to this economic blip like Chicken Little over-reacted to the acorn falling on his head.  Throwing taxpayer dollars around and even running up deficits in an attempt to “stimulate” the economy will do more damage than doing nothing at all.  It would be better for Mr. Harper to save taxpayers from the spending wolves.  He should balance the budget, and stay on a steady course, because the sky really isn’t falling after all. ESR

(c) 2009 Kevin Gaudet

 

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