The theme of divergence has been playing out in the global economy. One example is how the US Federal Reserve has begun their path of gradually raising interest rates whereas central banks like the Bank of Japan or European Central Bank have acted in recent months to lower policy interest rates and provide further economic stimulus through quantitative easing. Another, in the United Kingdom there is talk of a “Brexit” where citizens will vote in a referendum this June whether to remain a part of the European Union. Even in Canada we see divergence in the form of how the BC economy performs compared to the rest of the country.
Over the course of 2015, as commodities prices continued to tumble, the Canadian energy sector has had a net negative effect on the countries labour market. The province of Alberta lost more jobs last year than they did in 1982 when they were in recession. BC on the contrary, has seen employment growth of 3 per cent in the twelve months trailing February 2016. It leads the pack of Canadian provinces and is one of three to actually add jobs over the last year. Parts of this country are very challenged with economic opportunity while other regions are forecasted to show modest growth.
This in itself presents a very difficult challenge for the new Federal Liberal government as we begin to examine and digest the details of their first budget over the next couple of months. There are very clear have and have not regions of this country, and they must insure stimulus spending is (to quote Harvard economist Larry Summer’s) “targeted, timely, and temporary.”
Of the three T`s, all imply their own level of importance, but I`ll expand on the notion of being temporary. Whether the government runs a deficit amounting to half a percent or full percent of GDP is really inconsequential in the short run. That being said, TD`s Economics department updated their projections for the Fed`s budget with the latest data from the Finance Department and found from their estimates they are on track for run deficits totalling 150 billion over the next five years. This would in-fact twice break a Liberal promise of first capping deficits at 10 billion per annum and then second keeping the debt-to-GDP ratio fixed. This risks government spending creating negative connotations for returning to economic growth over the long run and having a debt that runs away like during the late 1980`s and early 1990`s.
Thankfully Canadian politics have exhibited a level of civility that is absent in most other western nations making headlines at the moment, and our new government has been given a mandate to spend as they see fit to reignite the Canadian economy. As BC`s forecasted to be most prosperous province through 2016 though we should hope for two things. The first being that the fiscal stimulus measures of the federal budget can provide an effective temporary lift to the Canadian economy. But, the second is certainly be careful what we wish for as the risks to over spending mean either higher taxes down the road or higher deficits bigger than planned as the government gets itself mired in debt.