By Dr. Roslyn Kunin, BC Business Columnist, Troy Media
Is the world economy headed into another downturn? Will Canada be dragged down with it? A quick glance at the composite leading indicators (CLI) released this month by the Organization for Economic Cooperation and Development (OECD) might lead one to think so, but this would be wrong.
According to the OECD indicators, of the countries they covered only the economies of Germany and Russia will be advancing. Canada, along with China India, Italy and France will be heading down and United States, Japan, and Europe as a whole are at what they call a possible peak, implying an imminent downturn.
Are the conclusions valid?
How valid are the leading indicators and the conclusions based on them? First, forecasting is always difficult, especially when applied to the future. Second, the numbers described above are based on monthly changes. At a monthly level it is very hard to distinguish what is a squiggle and what is the beginning of a trend. For example, in the OECD numbers, Germany shows a strong upward trend based on its vigorous economic activity up to last July. However, since the OECD leading indicators were released, the data on economic activity in Germany from August have turned sharply downward. Again, this is one month’s data, but it does tell us to be cautious about using monthly data to predict trends.
When we take a somewhat longer view and look at year over year changes, a different picture emerges. Over this time span, the CLI is positive for just about every country and group of countries covered. The only exception is China which shows a decline of one tenth of one per cent on its long term average –what my accountant friends would call a red zero. This should be taken in the context of China’s medium term growth trend in the 10-per-cent range with a slowdown to ’only’ around six per cent in the last recession.
Turning to Canada, the OECD leading indicator on a year over year basis is 6.6 points higher than its long term average of 100. In an economy like Canada’s, economic activity is measured by the amount spending by four groups, namely consumers, businesses, government and foreigners.
Consumer spending, while not booming, is continuing to rise at a rate of 3.7 per cent. Job numbers have been growing although the unemployment rate, at 8.1 per cent, is still higher than we would like. Interest rates are still historically low and for every potential home buyer deterred by high house prices, there are several home owners enjoying the wealth effect of their real estate.
Business spending or investment is 11.7 per cent higher than a year ago. Much of this is going into our resource industries to meet the global demand for food, energy, and minerals that is keeping our export sector strong. Thus, spending by foreigners is continuing to contribute to Canada’s economic growth even in spite of our strong Canadian dollar.
With consumption, investment and exports, that is, all parts of the private sector of the economy, looking healthy, one can safely forecast that the Canadian economy is likely to continue to enjoy positive growth over the coming year. This growth is likely to be in the two- to three-per-cent range – not a boom, but not a double dip recession either. The positive but even slower growth in the United States is a weight on Canadian activity as the US is still our largest trading partner. However, a growing share of our exports now head to Asia where double digit growth rates are the norm.
Weak government spending
The one component of spending that is not likely to continue to rise sharply is the government sector. Governments, both federal and provincial, are not in a strong fiscal position. They were under pressure to spend during the last recession at the same time as that recession was cutting into their revenues from taxes. The resulting deficits continue, causing growth in government debt.
On the subject of government finances, the OECD does have something to say that is well worth listening to. First, governments, especially those of Quebec and Ontario, need to put their fiscal houses in order by managing spending and revenue streams better. Second, Canada needs to take serious action an a major source of
fiscal imbalance, that is our out-of-control health care costs. The OECD advises user fees and more private health care. It will be interesting to see if this advice is heeded.
