Liberal budget projections fail to price in U.S. recession lurking around the corner

OTTAWA – Writing a federal finances are one thing, selling it can be quite a different matter.

Bill Morneau sets Canada on path for near-record deficits, growing to a lot more than $29B over next fiscal year

The Trudeau government has confirmed what a lot of private-sector analysts have predicted for months: Canada is headed for a string of near-record deficits as it plows tens of vast amounts of dollars into new programs – most of them promised, several not – together with multi-year infrastructure projects which have not yet been decided.

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In fact, almost from the time the document landed in the hands of analysts, some were already hesitant to buy into it – most critically, they question the long-term forecasts for that economy.

Over the next five years, the Liberal government is calculating a gentle easing in the fiscal debt outlook, paving the way for any gradual return to balanced budget – or perhaps increasing surplus.

But if economic history informs us anything, it’s that another recession might be lurking nearby.

“Usually the U.S. economy adopts a downturn in regards to a year or two years after the Fed begins tightening aggressively,” said Douglas Porter, chief economist at BMO Capital Markets.

So, while Finance Minister Bill Morneau is promoting his just-released 2016 budget like a blueprint for growing Canada’s economy, other medication is warning the years to come it’s still challenging. The root of this concern lies mainly with the health in our mammoth trading partner towards the south.

Economists at JPMorgan Chase & Co. in Ny are warning there is a 50-per-cent possibility of a U.S. recession in the next two years – an issue that could be supported on Friday when the U.S. releases its latest gdp data.  

“With wages picking up but productivity growing in slow motion, margins are likely to continue their declines, which have historically signaled an expansion near its end,” JPMorgan economist Jesse Edgerton said a research note.

Given Canada’s reliance of the U.S., that may point to trouble within this country, as well.

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“With respect to the budget, we’ve clearly identified the need to make investments to enhance our economy,” Morneau told reporters Wednesday, carrying out a breakfast speech to business leaders in Ottawa.

“We’ve also attempted to give Canadians a transparent understanding of the growth that people think can come from those investments,” he explained. “We’re being very prudent in our investments … along with the appropriate investments we can come with an improved situation tomorrow.”

Morneau’s budget drew a red line underneath the previous Conservative government’s annual spending documents, which had gradually seen a $55-billion-plus shortfall created during the 2008-09 recession whittled right down to a break-even level.

On Tuesday, the Liberals set a training course from now until fiscal 2020 for a new string of deficits, beginning with a $5.4-billion hole in fiscal 2015-16 that’ll be widened to a lot more than $29 billion within the fiscal year beginning April 1, prior to being trimmed to around $14 billion in 2020-21.

It’s uncommon for that U.S. economy to go ten years without a recession.

“Our goal is to buy to a balanced budget over, approximately, a five-year period of time – recognizing that our priority at this time is to make those investments,” Morneau said. “In a scenario of slow growth, which is where we have been during the last decade, in times where demographics are challenging, in times where interest rates would be the lowest they’ve have you been and that we have the capacity to make investments because our debt-to-GDP may be the lowest within the G7 – this is the right time to create investments to develop the economy.”

The last decade, of course, has included an economic crisis and global recession, and was followed by Canada’s slow and meagre climb back to growth, with the U.S. – this country’s biggest export market – helping to pull us along.

Now, the threat of some other downturn is raising its head.

“It may not happen this year, may possibly not even happen next year. But, let’s say, (the U.S. Federal Reserve) starts aggressively raising rates in late 2017, you may be taking a look at a recession some where around 2019, 2020,” Porter said. “It’s unheard of for that U.S. economy to visit ten years with no recession. It might be at the end of the timeframe, but I think it is extremely likely that over this five-year period we will undergo a downturn in the U.S. economy – which will affect Canada.”

Craig Wright, chief economist at RBC Economics, said “talk of the recession now is a little worrisome, but they do happen.”

“It’s definitely a possibility and the odds of it increase the longer the (U.S.) expansion is,” he explained. “If it’s a true recession, the (Canadian) fiscal numbers are out the window.”

Financial Post

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