Flaherty warns of ‘ downward risk’ to Canada’s economy
The federal deficit has fallen, but finance minister says he’s concerned about European debt crisis and sluggish U. S. recovery
OTTAWA — Federal finances have dramatically improved over the same time a year ago, but Finance Minister Jim Flaherty is warning about significant “downward risk” to the Canadian economy due to the ongoing financial crisis in Europe and a sluggish rebound in the United States.
Should the global economy take a severe downturn, Flaherty said the government is prepared to step in — as it did following the 2008 financial crisis — with fiscal measures to spur the Canadian economy and protect domestic jobs.
The federal government’s fiscal monitor on Friday revealed a budget deficit of $ 2 billion for the first three months of the 2012- 13 fiscal year ( April to June), fuelled partly by strong growth in personal and corporate tax revenues.
The first- quarter deficit was less than half of the $ 4.2 billion recorded for the same period a year earlier. The annual shortfall is on pace to be noticeably smaller than the $ 21.1- billion deficit for 2012- 13 that was projected in the March federal budget.
Canada’s continued modest growth demonstrates the country is on the right economic path compared with many other nations, Flaherty said Friday.
However, the global economic fallout from Europe’s sovereign debt and banking crisis, and the slow recovery in the U. S. continue to hinder the Canadian economy, he said, which was reflected in demand for exports slowing last quarter.
“The current global economic environment means that there is downward risk to the fiscal track presented in budget 2012,” Flaherty told reporters in Toronto. “Further slowing of the global economic situation can be expected to have an impact on Canada.”
The major risks to the Canadian economy remain the “pressing need” for European leaders to firmly and permanently resolve their sovereign debt and banking crisis, he said.
The eurozone has seen virtually no growth for more than a year and some of its key economies have tumbled back into recession, he noted, while the U. S. economic recovery continues to drag.
“This is weighing on the broader global economy. Canada, as an open trading country, is not immune to these developments,” the minister added. “The concern is the downside risk going forward later in the year. The Europeans, quite frankly, have still not dealt with their crisis.”
Asked whether the government would be prepared to engage in new deficit spending should the downside risks take hold, Flaherty didn’t want to speculate on what could happen, although he promised the federal government would be prepared to act.
“If we ran into a serious world economic crisis arising out of the European situation or something else — that seems the major downside risk now — then of course we would be responsive if we had to be to protect the Canadian economy and protect Canadian jobs, as we’ve done in the past.”
Flaherty said his European counterparts have indicated some optimism the economic crisis will be effectively dealt with by the fall, but he said he’ll believe it when he sees it.
Statistics Canada data also released Friday show annualized real gross domestic product ( GDP) grew 1.8 per cent between April and June ( the same as the previous quarter), compared to 1.7 per cent in the United States. The federal budget predicted real GDP growth of 2.1 per cent in 2012.
Emanuella Enenajor with CIBC World Markets said the 1.8 per cent growth rate was in line with the Bank of Canada’s expectations — “a pace of growth too slow to prod the Bank to pull the trigger on ( interest) rates any time soon.”
Douglas Porter, deputy chief economist with BMO Capital Markets, said in a research note the government’s warning about downside risk for its fiscal outlook is “a tad strange” considering federal finances are much improved compared to what was projected in the March budget.
However, federal officials may be more concerned about the outlook for the 2013- 14 fiscal year, when the budget deficit is expected to be cut in half to $ 10.2 billion, he said.
“The Canadian economy did slightly better than expected in the ( recent) quarter, but the pace was still nothing to write home about,” Porter said in the research note.
Flaherty also noted that Canadians are getting the message that interest rates will rise at some point, increasing residential mortgage costs.
Consumer indebtedness has improved in Canada over the last year, as more Canadians pay off their monthly credit card balances, he said, although concerns remain about mortgage debt levels.
“I remain concerned about residential mortgage indebtedness and I remain concerned about people taking on larger obligations than they would be able to afford were interest rates to rise, as they inevitably will.”