Can Canada’s politicians save slowing economy?

The race for a new prime minister is on, and, as in the U.S., there’s a good chance Canada’s slowing economy could be the issue driving the campaigns. However, whatever the party bigwigs say, it’s unlikely anything they promise will affect our country’s fortunes.

“Our near-term prospects are largely driven by what happens in the U.S.,” says Michael Gregory, an economist at BMO Capital Markets. “There’s not much we can do from a policy perspective to change that.”

He says the Bank of Canada could cut rates or someone might promise to make a few tweaks to the tax regime, but “at the end of the day, it won’t matter a lot.”

It’s likely Canadians will hear a lot about auto sector bailouts, as the threat of more vehicle plant shutdowns isn’t abating. However, if Americans are buying fewer cars, there’s not much any politician can do. Gregory adds that if a “major export market, such as the U.S., is shrinking, there’s little that can be done from a selling perspective because they’re buying less.”

Still, no one is going to simply blame the Americans and forget about the issue. If anything, the debate around Canada’s economy will leave the country scratching its head in confusion.

That’s because our economy is in a grey area — it’s not simple enough to say we’re doing well or poorly. Gregory points out that Canada’s headline GDP is very weak, and that hurts the manufacturing heartland of Ontario and Quebec. But the underlying demand is strong, with our commodity sector still booming.

“We’re in middle-of-the-road shape,” says Gregory. “So it’s a bit confusing. What we’ll see is that the Conservatives will say, legitimately, that the underlying growth is the best in the G7. The opposition parties will point to the headline GDP and the weaknesses in Central Canada.”

Despite the government’s relative lack of control over the country’s economic fortunes, there are some long-term ideas that could help Canada grow.

Gregory says whoever winds up in government needs to boost productivity by either getting more output for every hour we work or getting the same output while we work less. “That’s the only way we can increase our standard of living,” he says.

It’s also worth looking at revamping the marginal tax rate. “The rate at the highest level for individuals kicks in at relatively low levels,” says Gregory. “That might be affecting productivity.”

The bottom line is that Canada’s politicians need to figure out how the country can survive in a world where our dollar is no longer in the doldrums. Gregory says our currency’s value won’t fall back to 60 cents (or even 80). “We’re living with a 90 cents to parity range,” he explains. “How can we survive in an economy that competes with China and India? There are certain things that we do well, and those are the things we have to make commitments to.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(08/09/08)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.