Bloomberg News

Harper Running Out of Growth Drivers as Carney Warns on Trade

September 21, 2011

Sept. 21 (Bloomberg) -- Canadian Prime Minister Stephen Harper, who has overseen one of the developed world’s most robust economies during the global downturn, may be running out of drivers to sustain its growth.

The world’s 10th-largest economy shrank in the second quarter as exports plunged. Bank of Canada Governor Mark Carney said yesterday trade will remain a “major source of weakness” as the U.S. faces its slowest recovery since the Great Depression. The IMF cut its growth forecast for Canada.

“The risks to our economy remain largely external and are skewed to the downside,” Carney, 46, said in a speech in Saint John, New Brunswick.

Canada has relied on consumers and businesses to drive its expansion in contrast to Canada’s three previous recessions. That driver of growth may be waning as consumer debt levels hit a record, job growth and wage gains have slowed and the country’s benchmark Standard & Poor’s/TSX stock index has dropped 9.2 percent this year.

“We are operating in a slow growth environment,” Royal Bank of Canada Chief Executive Officer Gord Nixon said yesterday in an interview in Toronto. “That’s what we’re going to have to be used to for an extended period of time.”

The International Monetary Fund cut Canada’s economic growth forecast yesterday, citing weaker U.S. demand and slower government spending. The growth outlook for this year was reduced to 2.1 percent from a June prediction of 2.9 percent, according to the Washington-based lender’s World Economic Outlook. The expansion will slow further to 1.9 percent next year, down from the June forecast of 2.6 percent.

New Stimulus

“This is not an average recovery, and now the considerable external headwinds our economy has faced in recent years are blowing harder,” Carney said. “The United States is in the midst of the weakest recovery since the Great Depression, and the bank does not expect that to change at any time soon.”

The IMF said Finance Minister Jim Flaherty can afford to offer new stimulus if needed to sustain the recovery.

“For Canada, which is in a sounder fiscal and financial position than the United States, ongoing fiscal tightening can continue, but there is policy room to pause if downside risks to growth keep rising,” the IMF said.

Canada has “fiscal room” to stimulate the economy, though nothing has changed this week to warrant a shift in government policy from its focus on reducing the deficit, Flaherty told reporters in Ottawa yesterday.

Majority Government

Harper won his first majority government in May elections promising to balance Canada’s budget by the fiscal year that begins April 2014, after his Conservatives ran a record deficit during the recession while cutting personal and corporate income taxes to help sustain the expansion.

Flaherty has been encouraging his Group of Seven colleagues to live up to deficit-reduction commitments, saying earlier this month politicians may need to make difficult choices that “affect their opportunities for re-election.”

Harper said he anticipates the global economy will continue to recover and the Canadian economy will grow “slowly,” though he would act if the situation deteriorated dramatically.

“That’s the scenario upon which our plans are based,” Harper told reporters at the United Nations in New York yesterday. “We’re always watching the situation very carefully. It’s our number one priority, and should the situation change, we’ll make appropriate modifications in our plan.”

Trade Falters

Trade has been a diminishing source of growth since 2000, and became an outright drag in 2008 as a stronger dollar and cheap imports from China prompted Canadians to buy more goods from abroad. With Canada’s dollar rising more than 60 percent against the U.S. currency during the past decade, hurting the profitability of companies such as Montreal-based forest- products firm Tembec Inc., the share of exports in national output has fallen more than 10 percentage points over the past decade.

To help counter slowing growth in the U.S., Carney said Canada will need to increase its exports to emerging markets that are growing faster. He also said he expects commodity prices to remain at “elevated levels” on the back of sustained demand in Asia, and encouraged companies to bolster productivity through “heavy investment.”

Harper also has taken steps to encourage business investment, eliminating tariffs on imported machinery and equipment for manufacturing. The government has also pressed ahead with cuts in the country’s corporate tax rate, fending off accusations from opposition parties and union leaders the move was reckless at a time when the country is running deficits.

--With assistance from Greg Quinn in Saint John, Andrew Mayeda from New York and Doug Alexander in Toronto. Editors: Paul Badertscher, David Scanlan

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.


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