Europe’s debt problems and the global slowdown have significantly weakened Canada’s economy and pose even graver risks going forward, warns a leading international economic organization.
In a global forecast released Monday, the Organization for Economic Co-operation and Development said Canada is currently going through a rough patch of weak growth mainly because of the deteriorating external environment.
The OECD expects Canada’s economy to muddle through and post a soft 1.9% advance next year, followed by a stronger 2.5% expansion in 2013, but all bets are off if the European debt crisis spreads beyond the continent.
“We are concerned that policy-makers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” said chief economist Pier Carlo Padoan in issuing the report in Paris on Monday.
“Prospects only improve if decisive action is taken quickly,” he added, noting that the U.S. also needs to put in place a “credible” deficit reduction plan following the failure of the so-called “super-committee” to do so last week.
While most of the risks stems from European contagion, Canada is not totally blameless, the OECD says, citing “high levels of household indebtedness (that) are eroding consumer confidence.”
Recently, both the International Monetary Fund and the Economist magazine have flagged record levels of household indebtedness as risks to the Canadain economy. Household debt is at about 150% of disposable income, an all-time high.
Still, Canada’s economic expansion over the next two years will vie with the U.S. for tops in the G7 — which also includes eurozone members Italy, France and Germany.
Analysts note that because the American economy fell further during the 2008-09 recession, it must supersede Canada’s in growth just to catch up to its northern neighbour.
External troubles are hitting Canada on two fronts, the OECD says. Financial market turmoil is sapping domestic confidence and weaker global growth, along with the high Canadian dollar, is limiting growth in the export sector.
That’s the status quo scenario — with no imploding Europe.
The Paris-based organization makes clear all its member countries will suffer a much harsher fate if Europe’s mess spreads.
For instance, Europe’s growth, now expected to average a near-recessionary 0.2% next year, could sink to negative two per cent in 2012, and even more in 2013, if there is an uncontained sovereign debt default or major bank failure. In that scenario, growth in advanced nations outside Europe will be significantly weaker.
The Conference Board of Canada, in a fresh global outlook, draws the same conclusion.
“The major risk to the world economy is the European sovereign debt crisis,” said Kip Beckman, principal research associate for the Ottawa-based think-tank. “The current understanding to reduce bank holdings of Greek debt would provide for an orderly restructuring. But a `disorderly’ default could occur if Greece leaves the eurozone or if bailout funds are delayed. Such an outcome would spread across the EU and could send the global economy into a tailspin.”
Economists, as well as Finance Minister Jim Flaherty, have warned repeatedly that Canada could not escape unscathed if that were to occur. Flaherty has been blunt in saying European leaders should have moved much more quickly to deal with the debt crisis this summer.
The fall-out of a eurozone meltdown would likely cause a financial markets squeeze similar to what occurred in the fall of 2008, depriving businesses and consumers of the easy credit that has kept the economy above water since the recession. As well, global equity markets would drop further, sapping household wealth and business confidence. A third rail for Canada is the subsequent drop in commodity prices, that would slow the country’s strongest economic region, Alberta and Saskatchewan.
Bank of Montreal economist Douglas Porter agreed that Canada’s fate rests with Europe. He notes that even the United States, which is regarded as struggling, is still reporting relatively health economic numbers this fall.
“Frankly that’s about the only risk I can identify out there that’s serious and significant enough to possibly push North America into another recession,” he said.
On the OECD’s warning about household debt, Porter said that is an indication of how strong Canada’s domestic economy is in the face of the global storm. “If that’s the only flaw outside bodies can pick away at, it shows the relative robustness of our economy.”