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If a recession is coming, don't expect Ottawa to bail us out

The developed world is in clear and present danger of sinking back into recession. If that happens, the Harper government will be far less equipped to fight the downturn than it was last time.

Canadians will not be able to look to politicians for help if things go south. Those politicians are out of money, tools and ideas. More than any other recession in living memory, this time we'll be on our own.

Is a recession inevitable? Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, doesn't think so. He believes the odds are still high that falling stock markets and sagging growth rates will slow, but not reverse, the economic recovery.

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"We've been saying that global economic growth would be disappointing," he said in an interview. "I think what we're heading for is a longer period of disappointing growth."

But Bob Ascah, director of the Institute for Public Economics at the University of Alberta, is more pessimistic.

"We are going to be going back into a recession," is his judgment. Prof. Ascah believes high unemployment, fearful consumers and worries over government and personal debt will weaken the American economy to which our economy is so closely tied, sending both countries into a downturn.

If a recession is coming, then the question will be: Should Ottawa launch a fresh round of spending to stimulate a flagging economy, or continue to focus on fighting the deficit?

Finance Minister Jim Flaherty is, by nature, averse to stimulus. When the last recession roared in three years ago, his first reaction was to stay the course and keep the budget in balance.

But when the leaders of the G20 agreed that countries should pump money into their economies to stimulate demand, and the opposition parties threatened to bring down the minority government if he didn't act, Mr. Flaherty came up with the Economic Action Plan. Ottawa, in concert with the provinces, poured billions into infrastructure, which slowed the rise in unemployment and probably helped propel the Conservatives to a majority government in the last election. We call that irony.

This time things are worse, both at home and abroad. Debt that governments took on to fight the last recession could contribute to the next one. The European Union is struggling to keep several of its members from going into default. The Republican House of Representatives is adamant that the deficit must come down, leaving the United States without the political will to fight an economic downturn through federal spending.

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Central banks are unable to lower interest rates to stimulate demand because those interest rates are already at rock-bottom. The Bank of Canada's key interest rate is currently at 1 per cent, giving Governor Mark Carney some room for manoeuvre, but not much.

The federal government's debt as a percentage of gross domestic product stands at 34 per cent, which is pretty healthy compared to most other developed nations. But many provincial governments are in far worse shape. Ontario's debt-to-GDP ratio, once municipal, school and hospital debts are factored in, is expected to top 50 per cent by the middle of the decade, even without any additional stimulus. Quebec's debt-to-GDP ratio already stands at 60 per cent.

So while the federal government still has room for a fresh stimulus program, this time it won't be able count on the provincial governments to chip in as well. The next Economic Action Plan, if one is needed, will be much weaker than the last one.

That doesn't mean there will be no help from government at all. Mr. Flaherty and Prime Minister Stephen Harper "are very much pragmatist politicians," Prof. Ascah observes. "If it is desirable to add confidence through some selective government spending, they'll do that."

But there will be less stimulus than there was before. Unemployment, which is still higher than when the last recession began, will go higher still. And hopes for a balanced federal budget will disappear over the horizon.

This grim future can still be avoided, if governments around the world are able to calm jittery investors, bring debt crises under control and preserve at least some measure of growth.

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Cross your fingers.

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About the Author

John Ibbitson started at The Globe in 1999 and has been Queen's Park columnist and Ottawa political affairs correspondent.Most recently, he was a correspondent and columnist in Washington, where he wrote Open and Shut: Why America has Barack Obama and Canada has Stephen Harper. He returned to Ottawa as bureau chief in 2009. More

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