Manley: Canada remains a

(June 25, 2003) The Canadian economy is built to last, according to federal Finance Minister John Manley, but the prospect of a much longer recession south of the border continues to threaten our G-7-leading growth.

Manley was in Toronto to speak to the Economic Club of Toronto, warning that economic weakness in our trading partners, the severe acute respiratory syndrome (SARS) outbreaks in Toronto and the appearance of a single case of bovine spongiform encephalopathy (mad cow disease) in Alberta have all muddied the economic outlook.

Manley used the opportunity to announce revised projections for Canada’s GDP growth. He said that the private sector economists predict annual growth of 2.2%, down 1% from earlier projections.

The greatest risk to the Canadian economy, he warned, was the sluggish U.S. economy, which has yet to show real signs of recovery. But sluggish activity in Europe and Asia, hit hardest by SARS, offers little relief to Canadian exporters.

“I believe that the biggest factor for the Canadian economy is growth in the U.S., simply because I am confident that we will continue to export strongly to the U.S.,” he said. “What we need is a bigger marketplace. When that market recovers… we should see a good situation for Canadian exporters.”

Manley said that independent forecasters in the U.S. are predicting “very strong growth for the U.S. economy in the fourth quarter and the first quarter of next year… They’re as reliable as forecasts ever can be.”

“The key to a sustained recovery is an increase in investment spending, which for the moment remains at a low level,” Manley told the audience.

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He blamed a domino effect south of the border, where numerous corporate scandals have made companies reluctant to invest in expansion. The lack of industrial orders leads to layoffs, compounding the problem by decreasing consumer retail sales.

Deficits

He said that recent budgetary demands, such as relief for SARS and mad cow disease, development aid for Iraq and Afghanistan, and military expenses regarding the latter, have so far totalled about half a billion dollars. He added that amount would rise as further spending was directed to the domestic relief programs.

But Manley said that the federal books were in fairly good shape.

Higher than expected inflation in the first half of the year, led to higher nominal tax revenues, while low interest rates will lower debt service payments. Added to the $4 billion contingency fund, Manley says he does not expect the need to slip into the red.

“At this point, in my mind, I’m not ready to countenance running in a deficit,” he said. “I think from a political point of view it would be unwise. In fact, it might affect confidence to such a degree that would offset any economic benefit.”

But while the U.S. slashes taxes and increases spending in various projects, Manley said there was no political will in Canada to run a deficit.

“Canadians have bought very firmly into the notion that we should pay our bills as we go along,” he told the audience. “I think from an economic point of view, it might be a different matter.

“We certainly see this in the United States, where a very substantial fiscal deficit is being relied upon to provide stimulus. Personally, I’m glad they are providing stimulus, because I think we’re going to benefit from it.”

Manley touched briefly on the U.S. tax cuts when he was asked about the ongoing negotiations on the cross-border tax treaty.

“The important factor for us to consider is the impact of the president’s tax package and particularly the treatment of dividends,” Manley said. “It would appear, at the moment, that most (U.S.)-listed Canadian firms will continue to have their dividends treated in the U.S. in the hands of U.S. tax-paying recipients, identically to those of U.S. firms.”

Treatment of dividends from private firms or companies that are not listed in the U.S. is still under negotiation.

When asked about interest rates and the high value of the loonie, Manley dodged the issue, saying it was the purview of the Bank of Canada’s governor, not the finance minister.

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Do you think it’s clear sailing for the Canadian economy, or are we headed for the same storm as the U.S.? Share your thoughts or ideas with your peers in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb @advisor.ca

(06/25/03)

Steven Lamb