Friday, November 2, 2012

Why Are The Tories Pushing Canada Into Recession?

Remember how the Tories are the party you want to vote for in tough economic times because they're great managers and willing to make the tough decisions? Remember all that stuff?

Yeah, well, the Tories are poking holes in the Canadian economy faster than the rest of us can bail.

Two figures tell the tale. The first relates to the government's quiet austerity. At a time when, if anything, the economy faces contraction and deflation, the last thing you want to do is add momentum to that contraction and deflation. In fact the Tories promised a stimulus budget in the last election - they fought the election on that basis. But as soon as they were elected, it now turns out, the Tories scrapped the budget and started slashing. Is it any surprise that unemployment remains stuck at 7.4% and that the economy shrank in August?

Really, the only thing that has kept the economy on life support has been China's continued demand for resources and cheap money, that made it possible for workers with otherwise stagnant income (at best) to borrow & buy. But the Tories & Bank of Canada governor Mark Carney have put the kibosh on that strategy of ad hoc Keynesianism by making mortgages harder to get. There's still cheap money for the corporate sector - but they aren't buying and are, instead, simply banking hordes of cash. There's no stimulus to the economy from here.

The result: the housing sector, particularly the condo market are headed towards freefall with a 30 percent contraction in Toronto's condo market in the third quarter. Home sales nationally are off by 15 percent. With the industrial sector contracting, this is like solving the sickness of the economy by killing the patient. According to a CIBC report:
"A 5-per-cent per year drop in house prices, for example, would shed roughly a half-point off GDP growth through its wealth effect on consumer spending, given historical sensitivities," he added in his report. "The shift in the volume of construction will be even more consequential. If, as we expect, homebuilding returns to levels aligned with the longer-term trend in household formation, taking [housing] starts from the 220,000 per year range today to 180,000 by 2014, there will be a near 1-per-cent adverse swing in the contribution of homebuilding to GDP growth ... before allowing for any multiplier effects.
The same report forecasts growth of perhaps one percent, but given that August saw a .1 percent contraction, even that seems optimistic. If the housing market continues to contract, with house prices declining, that 1 percent prediction could easily be wiped out. The real question that arises is: why do the Tories want to push the country back into recession?

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