Little risk of another recession: Flaherty

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Little risk of another recession: Flaherty

MONTREAL – The risk that the economic slowdown in the United States will turn into another North American recession is not high, Canada’s finance minister said Tuesday as he cautioned that too many people nevertheless remain jobless in this country.

“I do not think the risk is great,” Jim Flaherty said in response to a reporter’s question at the International Economic Forum of the Americas taking place in Montreal. “There are risk indicators with respect to which we are concerned which we reviewed in the budget [Monday] and which I reviewed with the private sector economists with whom I met last week. The nature of the risks have not changed. We are concerned about debts and deficit in the United States and the need for a convincing longer term plan in the United States” to deal with those problems.

Ottawa is also concerned about some evidence of continuing slowness in the U.S. real estate market which puts a damper on consumer confidence in that country, Mr. Flaherty said. As well, it is worried about the sovereign debt situation among some eurozone countries, including Greece.
“These are all risk factors but they are known risk factors,” Mr. Flaherty said, adding that to address the risk in the latest budget, federal finance officials discounted private sector growth assumptions by $10-billion in nominal GDP each year, equalling a revenue markdown of $1.5-billion annually.

The U.S. economy grew at a 1.8% annual rate in the first quarter but job growth remains anemic, prompting U.S. Federal Reserve Chairman Ben Bernanke to say Tuesday that the central bank should maintain monetary stimulus to boost a “frustratingly slow” recovery. U.S. employers hired 54,000 more people in April, well below the 165,000 expected by economists.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” Mr. Bernanke said in a speech in Altanta.

The U.S. economy is growing above “stall speed,” Deutsche Bank AG foreign exchange analyst Alan Ruskin told Bloomberg in an interview Tuesday.

“A lot of people say that if the U.S. economy slows below 2% in year-over-year gross domestic product historically, we’ve slipped in to recession. The key is that we stay above that line, otherwise that is perceived as stall speed and other issues kick in.”

The pace of economic recovery in the United States is crucial for Canada because America is Canada’s largest trading partner, buying 75% of all Canadian exports like oil, wood and cars. Any major slowdown would hurt Canadian businesses and force layoffs here.

Mr. Flaherty maintained that unemployment in Canada also remains too high, even as his government initiates targeted hiring investments. The country’s unemployment rate stood at 7.6% in April as the economy added 58,000 mostly part-time jobs. Employment has grown by 1.7% in the last year.

Asked if the Canadian government has picked a preferred candidate to lead the International Monetary Fund, Mr. Flaherty said not yet. Former IMF chief Dominique Strauss-Kahn resigned last month amid allegations he sexually assaulted a New York City hotel worker. Agustín Carstens, the head of the Mexican central bank, and Christine Lagarde, France’s finance minister, are vying for the job.

In a speech to conference delegates, Mr. Flaherty stressed the importance of sound fiscal management for an elected government, noting no one truly foresaw the credit crisis in the fall of 2008 and subsequent recession. He said “it’s unpredictable” when the next shock might come.

The finance minister on Monday delivered a budget that included a pledge to bring the federal government back into surplus position by 2014-2015. He said he will do that through a combination of $4-billion in annual spending cuts and closing tax loopholes to generate another $4.1-billion.

The cuts mark the most intense attempt to rein in public sector spending in more than a decade. The government is conducting an operational review of the federal service and some departments have begun laying off staff.

Opposition against the cuts is expected to grow in the months ahead.

Canadian Auto Workers union president Ken Lewenza said Monday the government’s  spending will wipe out thousands of jobs and hurt service delivery. “With the economic rebound being so uncertain and anemic private sector investment growth, these billion-dollar cuts are the last thing Canada needs,” Mr. Lewenza said.

But compared to what a private company would do to trim spending, the government’s $4-billion plan is not very ambitious, Mr. Flaherty argued.

Mr. Flaherty’s savings target represents 5% of Ottawa’s $80-billion in annual discretionary spending. The government won’t book the savings until it achieves them and has not provided any details of which programs and departments will be affected.

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