#Budget2012 Analysis - Part 3 - Economic Developments and Prospects

We will now take a look at the second chapter of the budget. The highlights listed are as follows:

The global economic recovery remains fragile. The European sovereign debt and banking crisis continues to weigh on global growth.

The Canadian economy has remained resilient despite external weakness, reflecting sustained growth in the domestic economy.

Canada has had the strongest economic growth over the recession and recovery among Group of Seven (G-7) countries. This reflects our solid economic fundamentals and the timely support of the stimulus phase of Canada’s Economic Action Plan.

610,000 more Canadians are working now than in July 2009, the strongest job growth among G-7 countries over the recovery. This continues the strong performance that has resulted in over 1.1 million new jobs created since the beginning of 2006.

However, the fragile global economic environment will continue to be reflected in modest growth in Canada over the near term.

The Department of Finance conducted a survey of private sector economists in early March 2012. On March 5, economists met with the Minister of Finance to discuss the economic forecast as well as the risks associated with the outlook.

Private sector economists expect real gross domestic product (GDP) growth of 2.1 per cent in 2012 and 2.4 per cent in 2013, broadly unchanged from the November 2011 Update of Economic and Fiscal Projections.

Economists also expect the level of nominal GDP—the broadest single measure of the tax base—to be above the level anticipated over the forecast period at the time of the November Update.

Private sector economists agreed that near-term risks to the outlook have slightly moderated since the November Update, but continue to see global economic uncertainty as the key downside risk—in particular the potential for wider contagion of the sovereign debt and banking crisis in Europe.

To reflect the downside risks surrounding the global economic outlook, the Government is adjusting the private sector forecast for nominal GDP downward by $20 billion in each year of the
2012–2016 forecast period.

I've had to read Chapter 2 in the budget 3 times. Amongst all the praise, warnings, and prospects the price of commodities get only a small section near the end and their relevance isn't tied to global economic health. Perhaps one of the reasons government's are seemingly loosing the connection with their people and the true cost of living is that they will publish an entire section in a budget which it makes plenty of usage of the word "sustainable" yet doesn't consider if it's population can sustain paying the price. This builds off of part 2 and the devaluation of our currency.

I am impressed with the amount of time analyzing Europe but it looks to me as though Canada is far too confident that the 6 degress of seperation between us and them protects us. Japan is also briefly mentioned and not given nearly enough credit to their potential impacts on the global economic outlook when you consider they are most likely in an energy death spiral. China sees it, so why can't we?

Here is their section on Japan:

The more moderate pace of growth in employment since mid-2011 mirrors continued modest growth in real GDP, at 2.5 per cent in 2011. However, real growth showed considerable variation over the course of the year as a result of export volatility related to the Japanese earthquake and tsunami, as well as forest fire and maintenance-related disruptions in the energy sector (Chart 2.11). Household spending and business investment, on the other hand, remained resilient through this period.

Source

That's it, That is the only mention Japan got in this chapter on "prospects". Look on your electronics and see where most are coming from. I think it deserves more than a mention, don't you?

Another interesting note made by the government:

Reflecting the intensification of the euro-area sovereign debt and banking crisis in Fall 2011 and its impact on global trade and financial markets, the International Monetary Fund (IMF) has steadily downgraded its near-term global outlook over the past year. The IMF now expects global real GDP growth of 3.3 per cent in 2012, with growth in advanced economies expected to be just 1.2 per cent. The IMF also expects modestly slower growth in emerging economies, reflecting the worsening external environment and a slowdown in domestic demand in key emerging economies (Chart 2.5).

Source

Note that they say "steadily downgraded". Meaning more than once.


A large section of this chapter is dedicated to U.S. economic performance. Again though it barely references the compounded effect of all of these advanced economies hurting at the same time.

The U.S. economy continues to face significant challenges stemming from ongoing household deleveraging, necessary fiscal consolidation and spillover effects from the European sovereign debt and banking crisis. As a result, private sector economists continue to expect modest U.S. economic growth (Chart 2.4).

The problem I find with analysis like what's presented in this budget is that it is using past economic performance to predict future "sustainability" of growth. Past economic performance doesn't tell you about Japan's energy death spiral. Well it will, when it's in the past. Captain Hindsight?


Canada's recent economic performance has been good. There is no doubt about that, but our government's claims that it was their doing are hardly accurate. Yes they put out their own stimulus. Yes they bailed the our banks and autos. But what is more important is so did the U.S. Also as I pointed out in my post on IMF private loans, our banks are worried that the U.S. banks will stop the fraudulant practices that have caused the crisis in the first place. Why? Because corporations and governments need the market liquidity. They can not function with out the ponzi economic system the U.S. has relied on. We're tied to the U.S. at the hip. The U.S. has been bailing our economy out because we export so much to them. It was actually more important that Canada remain stable for the U.S. to not descend in to total collapse.

Canadian financial policy isn't what saved Canada, U.S. financial policy did.

World prices for the major commodities produced in Canada are key determinants of GDP inflation, and therefore nominal GDP. While there are both upside and downside risks to the commodity price outlook, particularly in the short term, the experience of the past decade suggests that continued strong demand from emerging economies is likely to put upward pressure on commodity prices over time. The private sector expectation for GDP inflation is consistent with largely flat commodity prices. This introduces an element of prudence into the economic-planning assumptions.

In light of ongoing downside risks surrounding the global economic outlook, the Government has judged it appropriate to adjust downward the private sector forecast for nominal GDP by $20 billion per year over the 2012–2016 period (Table 2.2). This adjustment for risk, representing a downward adjustment of $3 billion in fiscal revenues in each year of the forecast, reflects the remaining uncertainties surrounding the global economic outlook. Relative to the November Update, this adjustment is $10 billion lower for 2012, unchanged for 2013, and $10 billion higher per year in the following three years.

And thats the rosy outlook.

Stay tuned for part 4.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.