Private sector is not helping economic recovery

Please chip in to support rabble's election 2019 coverage. Support rabble.ca today for as little as $1 per month!

Tepid GDP numbers released Tuesday by Statistics Canada confirm that Canada's economic recovery, such as it was, is sliding completely into the ditch. We're clearly heading for stagnation at best, and quite possibly another "double dip" downturn.

The headline number was disappointing, to say the least. Real GDP grew only 2 per cent (annualized) in the spring quarter. That's just a hair faster than the U.S. economy (which everyone knows is still deeply in the soup). Two per cent doesn't keep up with population and productivity -- implying higher unemployment ahead, not lower. Typically, at this stage of recovery, the economy should be growing three times faster.

Dig a little deeper, and the picture looks even worse. Half the growth reported Tuesday was a statistical "shadow" of the faster expansion experienced in the first quarter -- earlier growth that automatically boosted the second-quarter numbers, whether the GDP kept growing or not. From March through June, actual growth was weaker, about 1 per cent annualized.

Moreover, the growth that did occur was due solely to inventory accumulation, as businesses began restocking the shelves in hopes of stronger market conditions. Strip out new inventories, and real GDP actually declined. But consumer spending is already slowing, and now those inventories will drag down future growth.

Another worrisome sign is the continuing deceleration of inflation, as measured by Statistics Canada's broad GDP deflator. Inflation fell to less than 1 per cent in the spring -- and in the consumer sector, prices were falling (deflation). That further erodes confidence, and increases real debt burdens for consumers and governments.

Tuesday's numbers confirm another curious and worrisome trend. Every economic recovery needs somebody to borrow and spend. That's where new purchasing power comes from. So far, this recovery has been precariously dependent on households and governments to do all the borrowing and spending. The spirit of growth has yet to infuse the private sector; consequently, Canada's recovery remains both narrow and precarious.

Debt-happy consumers accounted for much of last year's rebound. Their spending was largely channelled into Canada's short-lived housing bubble (which popped audibly last spring). With total personal debt now equal to 150 per cent of disposable income, we know that consumers must retrench. Indeed, they're already cutting back, as evidenced by a big uptick in the saving rate.

Governments, of course, have been the other key source of spending power, through deficit-financed stimulus programs. Those injections will also start to ebb, as governments at all levels pull back (not too quickly, one hopes, or else the threatened double dip will become a sure thing). So with both consumers and governments tightening their belts, who will lead the next phase of recovery? It should be business. But, so far, the private sector is still sitting firmly on the bench.

Despite a few signs of life (mostly in the oil and gas industry), overall business investment spending has not bounced back at all. Business capital investment is just 6 per cent higher than it was in the trough of the recession a year ago. Yes, profits shrank during the downturn, but they're recovering. And businesses aren't even reinvesting what they get, let alone taking on new debt. Cash flow (profits plus depreciation) continues to outstrip new capital investment by almost 2-to-1.

The odd result of this private-sector passivity is that non-financial firms have actually saved close to $100-billion since the recession began. That about offsets the new debt taken on by our governments over the same period. In other words, governments (and the taxpayers who fund them) are taking on debt to try to restart a sick economy. But for every dollar they put in, private firms take out a dollar -- in the form of idle, uninvested cash flow, used to pay down their own debt or, worse yet, to speculate in the paper markets.

Business should be leading economic recovery, borrowing money (from households and banks) to fund new investments and jobs. That's how capitalism is supposed to work. In today's lean-and-mean world, however, business is free-riding on the spending efforts of others. Despite tax cuts and other business-friendly policies, the private sector isn't taking on the risks, and taking on the debt, necessary to fuel broader recovery.

That longer-run imbalance, not just the weakness evident in the shorter-run economic data, will hold back Canada's economy for years to come. Governments clearly need to keep stimulating through budget deficits and low interest rates (rather than choking off recovery with premature tightening). But in the absence of business leadership, they'll also have to take on a bigger task: finding ways to directly expand output and create work, filling the vacuum left by the private sector's continuing failure to borrow and spend.

Jim Stanford is an economist with the CAW.

No corporate owner. No government money. No endowment. No cost to visit and use rabble.ca. Please become a member of the community that makes rabble happen and become a member today (www.rabble.ca/membership).

Related Items

Thank you for reading this story…

More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all, while striving to make it sustainable as well. Media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our main supporters are people and organizations -- like you. This is why we need your help. You are what keep us sustainable.

rabble.ca has staked its existence on you. We live or die on community support -- your support! We get hundreds of thousands of visitors and we believe in them. We believe in you. We believe people will put in what they can for the greater good. We call that sustainable.

So what is the easy answer for us? Depend on a community of visitors who care passionately about media that amplifies the voices of people struggling for change and justice. It really is that simple. When the people who visit rabble care enough to contribute a bit then it works for everyone.

And so we’re asking you if you could make a donation, right now, to help us carry forward on our mission. Make a donation today.

Comments

We welcome your comments! rabble.ca embraces a pro-human rights, pro-feminist, anti-racist, queer-positive, anti-imperialist and pro-labour stance, and encourages discussions which develop progressive thought. Our full comment policy can be found here. Learn more about Disqus on rabble.ca and your privacy here. Please keep in mind:

Do

  • Tell the truth and avoid rumours.
  • Add context and background.
  • Report typos and logical fallacies.
  • Be respectful.
  • Respect copyright - link to articles.
  • Stay focused. Bring in-depth commentary to our discussion forum, babble.

Don't

  • Use oppressive/offensive language.
  • Libel or defame.
  • Bully or troll.
  • Post spam.
  • Engage trolls. Flag suspect activity instead.