Today, it was announced that Canada’s GDP for the final quarter of 2018 showed signs of economic slowdown. The announcement was quickly followed by a “crushing blow” to the value of the Canadian dollar.
In December, the service sector saw 0.2% growth, while manufacturing and goods-producing decreased by 0.7% each. Oil and gas shrank 0.3%, and support activities for mining and oil and gas fell by 16.8%.
It was the month when Alberta’s NDP premier was forced to cut oil production in order to support prices, which is at least in part thanks to political turmoil around resource development in Canada.
A recession is ordinarily defined as negative GDP growth in two successive quarters. Most experts agree that we are at risk of facing one soon, with their only hope being a small boost in employment numbers for January.
The prospect of a recession has been used as a political talking point against the federal government’s attempt to further raise taxes, and this news will not help an already troubled government. It may at least partially be of their own doing, as will be explained below.
The Bank of Canada was looking to further raise its overnight interest rate to a “normal” level, which will be at least 1.0% higher than the current rate. Interest rates fell to historic lows in the wake of the 2008 financial crisis.
While there is little reason to think that rates will go down, it might convince the nation’s central bank to hold the brakes on raising the interest rates for a little while. In both December and January, the Bank of Canada announced that it would maintain its current overnight rate target at 1.75%.
Prime rates normally increase and decrease with the central bank’s overnight rate.
The rate hikes had been signs that the economy has mostly fully recovered from shocks in 2008, and government overspending may also have contributed.
Effect of Government Spending
The government sometimes needs to stimulate the economy through investment, but the current government’s spending increases despite an improving economy has left our country in a vulnerable position.
It has unnecessarily increased the national debt, which in turn affects what percentage of our tax revenues must go towards “servicing the debt”, which means paying the interest that has accumulated on existing debt just to maintain the level of debt.
While the government can borrow more money to pay the interest, that will increase the portion of tax revenues that must go towards interest. If the government continues to do this, there would eventually come a point where the total annual tax revenues are less than the annual interest on the debt.
This may sound far-fetched, but even with no increases in spending and no cutting in taxes, GDP growth will have a very slim chance of keeping up with a healthy schedule of interest hikes. This means that we will continue to have a relatively low interest rate, which leaves less room to cut interest rates to stimulate economic activity in case of a recession.
Japan’s central bank famously had to post negative interest rates, which means that banks would essentially be fined for the amount of money in their possession at the end of each day, encouraging banks to ensure that all of their capital is being circulated in the economy.
Recessions come, whether we like them or not, and government overspending is the number one hindrance to preparing for them.
The poor GDP numbers in today’s announcement could unfortunately serve as a convenient election year excuse for the Liberals to table a federal budget that is even more expensive than it would already have been otherwise.
The last quarter also gave us our first look at the economic effects of marijuana legalization, with numbers suggesting that around 80% of household spending on marijuana still goes to the black market.
It was the first quarterly report that took marijuana into account. Statistics Canada conducted research into using health surveys to estimate the value of the illegal market.
Although some of the economic output of the illegal market will have already been accounted for in previous GDP reports, there is likely to be a positive effect on GDP numbers by accounting for this new spending category.