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With news of economic turmoil in China and other emerging economies, repercussions for Canada will be quite “atrocious.” Expect the recession to continue beyond the second quarter of 2015.
This raises questions about the supposed recovery in the second half of 2015. Currently, Canada is in recession. Most pundits are predicting that it is a mild recession, and that Canada will fully recover in the third and fourth quarters of 2015. But those predictions are surely wrong and are based on faulty economic logic.
Just like back in February, when I predicted we were headed toward a recession, I am predicting now that the current recession will stay with us through the third quarter. The macroeconomics are just not adding up for a recovery in the third quarter of this year.
For the record, this is not a mild recession. Some pundits are repeating this, although the economic logic of such a statement is grotesquely flawed. They claim labour markets are not showing signs of a recession. This is wrong. We know that large parts of manufacturing are badly reeling, in addition to the oil sector. Labour market participation is falling leading to false readings with respect to the unemployment rate. Once you factor in the fact that thousands of Canadians withdrew from the labour market, you end up with a much higher unemployment rate. Lastly, jobs being created are overwhelmingly bad jobs: part-time and self-employment. Granted, there have been worse recessions, but let’s not fool ourselves into thinking this is a mild recession as if it is undeserving of our attention. Why else would the Bank of Canada be panicking?
Currently, most economic institutions, from the Bank of Canada to the IMF, and most Canadian banks, have already revised downward their growth predictions for the second half of 2015. Most are now predicting tepid growth at best. This is based on a number of factors, including and in particular, economic growth in the U.S. and other parts of the world. But there are a number of reasons why current events will force observers to rethink their predictions.
Here are five reasons not to expect a recovery later this year:
1. First, in the last 6 months or so, growth forecasts kept being downgraded in light of new information, until we realized that we were indeed in a recession. I fear we are simply repeating the same errors, blinded by our false illusions. The sooner we realize we are in a recession, the sooner we can deal with the proper macroeconomic policies to deal with it. Reducing the rate of interest will have no effect, so let’s stop talking in terms of monetary policy. We need fiscal stimulus.
2. Second, it is not clear how the U.S. economy is performing. While most were predicting an increase in the rate of interest, now that consensus is weakening and it is no longer clear where U.S. interest rates are going, indicating softer-than-expected U.S. economy especially with respect to inflationary expectations.
3. Third, the continued weakening of the oil industry continues and will possibly intensify its impact on the Canadian economy. Prices are expected to further decline, some predicting in the lower $30s a barrel. In fact, one famed financial analyst is predicting prices as low as $20 and even $10 a barrel. Our economy is not sufficiently diversified to overcome this level of weakness in an industry that once dominated our economy. And if prices fall as low as predicted, then expect more “atrocious” news from that sector in the coming months, and its far-reaching impact on the Canadian economy.
4. Fourth, the near-collapse of the Chinese and other emerging economies will undoubtedly have an impact on our exports, outweighing any advantages the collapse of our dollar may have.
5. Fifth, current fiscal policy is simply not sufficient to prevent a further deterioration of our economy. Mr. Harper’s obsession with balancing the books is bad economics especially in times of continued crisis. His piecemeal approach, or what has been called boutique-tax credits, is aimed at placating a fickle electorate by offering housing credits and the likes, rather than promoting economic growth. Boutique tax credits are not the same as a bold macroeconomic strategy.
Refusing to discuss the economy won’t do us any good. We must address the elephant in the room before it creates more harm.
Louis-Philippe Rochon is associate professor of economics at Laurentian University and founding co-editor of the Review of Keynesian Economics. Follow him on Twitter @Lprochon
Photo: KMR Photography/flickr
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