By THEO VAN DE KLETERSTEEG
Perhaps it is instructive to review where Canada stood in the world on a number of key economic indicators back in 2019, and where we stand today.
Every nation, except China, has suffered hugely from the pandemic. The humanitarian aspects of the crisis have been (and continue to be) devastating in most parts of the world, particularly in countries that were among the least prepared to deal with adversity. Canada was not prepared for the pandemic, and the reality of the situation took a while to sink into the minds of political leaders who were initially slow to act. However, a key differentiator between Canada and most other countries of the world was Canada’s ability to borrow. And borrow it did, to buy huge volumes of vaccines, and to support workers and businesses that had suddenly come face to face with severely diminished incomes.
During the year 2020, China was the only country in the world that showed positive economic growth (6 per cent GDP growth), a remarkable feat. All other countries showed declines. By the 4th quarter of 2020, signs of economic recovery had become clearly visible, with China showing growth of 6.5 per cent (quarter over quarter), Taiwan 5.1 per cent, Turkey 5.9 per cent, and 4 other countries also showing positive growth. Canada’s GDP declined 3.2% during the quarter. The numbers reflect those tracked by The Economist, and consist of 43 countries which typically consist of the developed nations of the Americas, Europe and Asia. Only one African country is included. “Emerging” countries are not included, but are typically in dire financial straights.
By the first quarter of 2021 more progress had been made, with 15 out of 43 economies reporting positive economic growth. China beat the record, again, with a growth rate of 18.3 per cent, followed by Taiwan (8.9 per cent), Hong Kong (7.9 per cent), and Peru (3.8 per cent). 14 other countries also showed positive economic growth. Canada recorded GDP growth of 0.3 per cent.
Looking at other economic data for the second quarter of 2019, only three countries did not report increases in consumer prices. Average increases were about 2 per cent. Unemployment rates were already high, pre-pandemic, but out of 43 countries, only 7 recorded unemployment rates in excess of 10 per cent. South Africa’s topped the list at 29.0 per cent.
Pre-pandemic, it is evident from the numbers that economies of the world were already in trouble. In terms of government Budget balances, only 13 out of 43 countries managed to run their economies within their financial means, or reported a surplus. The largest surplus reported was that of Norway (6.6 per cent of GDP). Of the 12 other countries that reported surpluses, all were less than 1 per cent of GDP. Canada reported a Budget deficit of 0.8 per cent of GDP.
Fast forward to the first quarter of 2021, consumer prices were on the rise everywhere but, with only a few exceptions, reasonably well contained. Canada’s Q1 consumer prices were up by 3.6 per cent. Unemployment rates increased dramatically, with 11 countries reporting increases beyond 10 per cent. Canada’s was 8.2 per cent.
As for Budget balances, by Q1 of 2021 every country was in deficit, including China. Canada’s deficit of 9.0 per cent of GDP was at the high end of the scale, exceeded only by the US (13.5 per cent), Britain (11.5 per cent),and Italy (11.8 per cent). The best performing countries were Denmark, Norway, Russia, Taiwan and the Netherlands.
Lastly, we need to make mention of the current account balance, which records the value of exports and imports of both goods and services, and international transfers of capital. The current account measures the nation’s earnings and spendings abroad and it consists of the net flow of exports minus imports, plus net inflows or minus net outflows of capital. A current account surplus indicates that the value of a country’s net foreign assets grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation.
To most countries, including Canada, a positive current account balance generally means that the country’s exports are competitive in a global context, and that the country is a favoured destination for foreign capital. A negative balance generally implies trade problems and/or a business environment that is not conducive to attracting foreign capital.
More than half of the countries in the survey (27) have a positive current account balance. Unfortunately, Canada is not among those countries. In fact, Canada’s current account deficit of 2.0 per cent is only exceeded by the US (3.0 per cent), Britain (4.5 per cent), Greece (3.7 percent), Turkey (2.2 per cent), Colombia (3.4 per cent) and Egypt (3.1 per cent). Singapore put in the best performance, with a surplus of 17.8 per cent, followed by Taiwan (15.5 per cent) and the Netherlands (11.0 per cent). Speculating on the reasons for Canada’s poor performance, I suspect that it relates to the super stimulus that the government has provided to individuals and corporations during the pandemic, plus the impacts of foreign investors liquidating their investments in Canadian oil and gas companies. In addition, net export performance has stalled. A country like Canada depends significantly on foreign capital to help fund major investment projects and, presently, to support the massive government Budget deficits that are currently being incurred and to which there is no planned end in sight.
For the fiscal year ended March 31, 2019, the federal government took in revenues of $332 billion, but spent $346 billion, producing a Budget shortfall of $14 billion. For the year ended March 31, 2020, the last pre-pandemic year, its revenues held steady ($334 billion), but its expenses increased, resulting in a shortfall of $40 billion. In fiscal 2021, revenues sank to $296 billion but, following an explosion of expenses, there was a $354 billion shortfall. Record spending by the federal and provincial governments in 2020 resulted in a combined federal/provincial debt as of March 31, 2021 of just over $2.0 trillion!
Canada spent big to provide its citizens with financial support, much more so than the overwhelming majority of other nations. The money has been spent, but has not made Canada more competitive, and has not created any new industries. Future spending will be more restrained, but Budget shortfalls are expected to continue for decades to come, with the projection for the current year being a shortfall of $155 billion. These are staggering numbers, particularly when measured against Canada’s revenue levels. Social spending is a laudable objective, but we should always keep in mind that in the long run we cannot spend more than we make, without facing dire consequences. So perhaps we should pay more attention to creating a national economic plan that may help guide us to funnel resources into industries that will help create the high value economic activities that might pay for our grandiose future spending plans.
In addition to the pandemic, the impacts of climate change will begin to bear down on government spending. Clearly, the destruction caused by adverse climate events, and the necessity to look after people whose lives have been up-ended will cost Canada and the provinces dearly. Improved healthcare and senior care are evidently budget items that can no longer be ignored. Indigenous people want a better deal. Furthermore, meeting Canada’s obligations under climate change accords will be expensive. There is no shortage of demands for federal and provincial spending. Where is all the money going to come from? It is clear that it is only a matter of time before Canada will be forced to deal with accumulated debt. Moreover, despite all the promises made by political candidates on the campaign trail, there will have to be a re-alignment of spending priorities because there simply isn’t enough money to pay for everyone’s pet projects. The coming combination of spending restraints and tax increases is bound to put a damper on economic activity. However, the clouds may have a silver lining: lower economic activity will reduce carbon emissions…….