What with the endless problems in the Eurozone, the UK's ham-fisted attempts at austerity and the fiscal woes in the US, the state of Canada's economy hasn't been getting much attention in the international media in recent times. After all, good news is no news, right? Canada's banks made it through the financial crisis unscathed, and energy development in the western provinces is making up for slackness elsewhere, so what's to worry about?
Quite a bit, as it happens:
* All is not well in the energy patch. Rising shale oil production in the US is cutting into demand for Alberta oil sands crude, which is relatively heavy. As a result, producers are being forced to sell their product at hefty discounts to prevailing world prices. This has pushed the Province of Alberta, where the phrase "saving for a rainy day" seems never to have been heard, into a budget deficit.
* The Keystone XL pipeline, which would provide an improved outlet for oil sands product, remains in doubt, even though the most recent State Department assessment seems to suggest it would not add to pollution levels. Alternative schemes to move Alberta oil to Eastern Canada through existing pipelines are facing equally determined opposition from environmentalists.
* Although it's been weakening in recent weeks, the Canadian dollar has been at or above par with the US dollar for several years, which has put renewed pressure on the manufacturing sector. That sector was dramatically "hollowed out" years ago as a result of free trade and globalisation, and the strong exchange rate seems to be finishing the job. This is particularly significant for Ontario, the most populous province in the country, which is now bizarrely regarded as a "have not" jurisdiction!
*Despite low interest rates, the housing market in most parts of the country is going nowhere, although Vancouver remains an exception. One thing low rates have done is to encourage frenzied condominium building in Toronto, which has more skyscrapers under construction than any city in the world apart from Shanghai. It bears all the hallmarks of a disaster waiting to happen, especially when interest rates eventually start to rise.
*Lastly, the imminent departure of global central banking superstar Mark Carney from the Bank of Canada for the bigger job at the Bank of England adds a fresh layer of uncertainty at an inopportune moment. It looks as though an internal candidate, deputy governor Tiff Macklem, will get Carney's job, but a search firm is currently looking around for suitable outside candidates for the government to consider.
Given these headwinds, it's no surprise to learn that the Canadian economy grew at only a 0.6% annualised rate in the final quarter of 2012, with particular weakness evident in the month of December. It all adds up to a challenging backdrop for the Federal budget in a few weeks time. You might think that the government would want to avoid making the economy's problems any worse at such a juncture, but it seems you'd be wrong. Cheerful, potato-faced Federal Finance Minister Jim Flaherty says that because the slowdown in the economy has reduced revenues, he's going to have to look at further spending cuts in order to get the government's deficit reduction plans back on track. He can hardly have failed to notice how that approach has backfired badly in the UK, but then, nobody ever learns from other people's mistakes, do they?
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