In the bleak midwinter

Canada's GDP was unchanged in October after a marginal decline in September. The details of the report provide further evidence, if any were still needed, that relying on a weak currency to stimulate the economy is not working.

The fall in GDP in September was largely the result of a decline in resource production, reflecting the steep decline in energy and other commodity prices on world markets.  Surprisingly, and probably unsustainably, the resource sector managed a small rebound in October. Unfortunately, that recovery was fully offset by weakness in other key sectors, including retail, utilities and manufacturing.

It's the last of those that's the most concerning.  The Bank of Canada's low interest rate/low exchange rate approach is predicated on the idea that manufacturing exports can offset the weakness in the resource sector and keep the economy moving ahead, albeit slowly. Even with the US economy, the destination of 70 percent of Canada's exports, expanding steadily, this really isn't happening. As I've stated here several times before, the manufacturing jobs that vanished over the past decade, mainly in response to an overvalued dollar and lunatic energy pricing in the province of Ontario, are gone for good.

The near term outlook for GDP is not encouraging. It's not just that the oil price has continued to fall: remarkably warm weather across the eastern half of North America has led to such a buildup in oil and gas supplies that further cuts in production are unavoidable. And there's little reason to think that the manufacturing sector is set to stage a sudden recovery.  Slow growth or no growth seem to be locked in for many months to come.

What should the policy response be? There is already speculation that Bank of Canada Governor Poloz will have to move ahead with the negative interest rates that he mused about just a week or two ago.  That won't help, but that is no reason to think that it won't happen. Fiscal stimulus would be more effective, and the new Government is committed to providing it, but it turns out that the outgoing Harperites were lying about the state of the country's finances before the election, so there's less room for manoeuvre than PM Trudeau and his Finance Minister were expecting.

The smart move would be for the government to announce a significantly bigger stimulus package than they previously promised. We'll find out early in the new year if they're ready for the right wing obloquy that such a strategy would undoubtedly trigger.

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Best wishes for the Christmas season and a Happy New Year to all readers of the blog!