Never mind Mike Duffy and the Senate expense scandal, Stephen Harper has much bigger problems — Canada’s economic numbers are going the wrong way heading into an election year. The loonie closed at 93.14 cents against the U.S. dollar on Friday, a gain of 19 basis points on the day. Earlier in the day, the Consumer Price Index for June showed inflation at 2.4 per cent annually, compared to a consensus forecast of 2.2. A week earlier, StatsCan reported 9,400 jobs lost in June, with unemployment rising to 7.1 per cent from 7.0 percent in May. This compared to a gain of 288,000 jobs in the U.S., with unemployment falling from 6.3 to 6.1 per cent. Oh, and 34,000 jobs were lost in vote-rich Ontario. This is not a positive convergence of numbers. The loonie is at least three percentage points higher than the Harper government and the Bank of Canada would like it to be, where it was last winter, closer to 90 cents. Both the government and the bank have spent the last six months talking down the dollar from years of exchange rate parity with the greenback. Why? Because a higher dollar hurts exports, particularly to the U.S. But a lower dollar makes imports such as food more expensive, notably fruit and vegetables. Not to mention gasoline prices. And it’s starting to show up in inflation numbers, which the bank likes to see in the middle of a range of 1 to 3 per cent. It has been steadily moving to the higher end of that range. As for the jobs report, it’s especially worrisome when compared to employment growth in the U.S. Canada came out of the deep 2008-09 recession ahead of the U.S., and for most of the years since has enjoyed better job creation and lower unemployment rates. Not anymore. In the last year, the Canadian economy has created only 72,000 new jobs, the lowest number since 2010. For the Conservatives, this is way off their narrative of Canada coming out of the recession in the best shape of any G7 country, and creating more than 1 million new jobs since then. “Justin Trudeau has re-built the Liberals as a competitive alternative to the Conservatives … which is why, for Harper, he simply needs to own the economy.” The economy has been the Harper government’s signature issue, and competence has been its core attribute. The one clear bright spot for Harper is the fiscal framework. The current deficit of $2.9 billion is 0.1 per cent of GDP, with a projected surplus of $6.4 billion next year. This includes a $3 billion contingency reserve, meaning the books are now essentially balanced. This means that in the 2015 budget the Conservatives will be able to make a symbolic small down payment on the debt, while allocating most of the surplus to voters in an election year. Thank you, Jim Flaherty. But if Harper isn’t concerned about the direction the economy appears to be headed now, he should be. Remember, as James Carville put it so succinctly, when it comes to voters, “It’s the economy, stupid.” With the Senate expense scandal and a mood for change working against him in the last year, the prime minister has always been able to fall back on the narrative of the Conservatives as expert stewards of the economy. It has long been their trump card, and if they lose it, they’re done. They might be done anyway. By the time of the fixed date election in October 2015, Harper will have been in office for nine years and nine months. Let’s call it a decade. In a normal election cycle, it would be time for a change. Moreover, Harper is not facing weak Liberal leaders, as he was with Stephane Dion and Michael Ignatieff in 2008 and 2011. Justin Trudeau has re-built the Liberals as a competitive alternative to the Conservatives, and his personal brand is strong. Which is also a problem for Tom Mulcair and the New Democrats. They’re the official opposition, but their opponent isn’t Harper so much as Trudeau. Trudeau has no footprint on the economy and jobs, and that’s his major challenge. The Liberals do and they’ve been quick to assert that Canada would never have weathered the recession as well as it did had Jean Chretien and Paul Martin not been such strong economic leaders. Which is why, for Harper, he simply needs to own the economy. And at this point, it’s very hard to read. Even the Bank of Canada, one of the best central banks in the world, seems perplexed. At a recent press conference on its quarterly monetary report, the bank’s governor, Stephen Poloz, spoke of “serial disappointment” in global economic growth coming out of the recession. If he said it once, he must have said it 10 times. “Economic activity in Canada is projected to be a little weaker than previously expected,” the bank said in its report summary. “Real GDP growth is projected to average around 2 ¼ per cent during 2014-16.” Those aren’t robust growth numbers for Harper to take into an election year. Poloz also said he wouldn’t be raising interest rates any time soon. The bank’s overnight rate will remain at 1 per cent, probably for the next two years, which is to say until after the election. In this, he’s aligned with U.S. Federal Reserve Chair Janet Yellen, who is keeping the Fed funds rate at near zero per cent. This means money will continue to be cheap. For example, BMO offers a one-year closed mortgage at 3.14 per cent. While some may worry about the housing market overheating, no one predicts a bubble bursting, as it did in the U.S., as a trigger of the 2008-09 global financial crisis. That may be because in Canada, your bank has to know you, and you have to make a minimum 5 per cent down payment on the mortgage. Then there’s the stock market, which is trading in record territory. The TSX in Toronto and the Dow in New York closed at and near all-time highs on Friday. The TSX went out at 15,287, up more than 5,000 points since the end of recession and more than twice its value after the crash in 2008. The Dow, at 17,100, is up from the 9,000 range at the end of the recession. This could be what former Fed chair Alan Greenspan once famously called “irrational exuberance.” Indeed, in congressional testimony last week, Yellen took it upon herself to comment on “substantially stretched” valuations in social media and bio-tech stocks, which immediately took a hit. In larger terms, a correction is due at some point, just not in the middle of a summer rally. In 1929, 1987 and 2008, the stock market crashed in October, and at the back of his mind Harper must be hoping history doesn’t repeat itself in 2015. — L. Ian MacDonald is editor of Policy, the bi-monthly magazine of Canadian politics and public policy. He is the author of five books. He served as chief speechwriter to Prime Minister Brian Mulroney from 1985-88, and later as head of the public affairs division of the Canadian Embassy in Washington from 1992-94. ipolitics.ca/2014/07/20/harper-risks-losing-economy-as-trump-card/
Posted on: Mon, 21 Jul 2014 17:41:42 +0000