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.
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