MNI: Trudeau Deficit Unlikely To Fix Canada's Vibecession
MNI (OTTAWA) - Prime Minister Justin Trudeau’s expected boost to deficit spending Monday is unlikely to cheer up Canadians roiled by expensive groceries and vacations, a housing squeeze and a shaky job market, budget experts told MNI, a view buttressed by the resignation of his own finance minister just hours before she was due to deliver the fiscal plan.
An update due after 4pm EST Monday is set to see the budget swell to at least CAD47 billion from the April “guardrail” of CAD40 billion, and it's now unclear who will even present it after Chrystia Freeland resigned this morning as finance minister. Freeland recently cited the government's challenge in turning around a "vibecession" for Trudeau's Liberals ahead of an election due by the fall of 2025.
"At least some households are pulling back spending, in a recession like manner," says Conference Board of Canada chief economist Pedro Antunes, who has helped advise the government on budget forecasts and often testifies to parliamentary committees. Per person consumer spending is down about 1% from 2019, he estimates.
"The impact of high inflation and high interest rates is having a disproportionate impact on lower income households, newcomers, and younger households," Antunes said. "I suspect that this is why we’re seeing food banks strained and consumer sentiment negative."
CONSUMERS KEY TO BOC
The BOC says consumers are key to the outlook and officials cut interest rates by 50bps for the second meeting in a row Wednesday. There is little precedent for making consecutive jumbo cuts outside of a crisis, and meeting minutes earlier this year showed concern such action could trigger public alarm.
That sense of alarm was amplified in Freeland's resignation letter. She criticized the government's two-month federal sales tax holiday that began this weekend and said "costly political gimmicks" will "make Canadians doubt that we recognize the gravity of the moment" as Donald Trump threatens a 25% tariff next month. Freeland is also seen as a future candidate to replace Trudeau.
The economy is already weakening. Unemployment has risen to the highest since 2017 excluding the pandemic to 6.8% and TD Bank predicts it will average 6.5% next year or two notches above 2024. Perhaps the most widespread irritant is that while inflation has slowed to 2% from a peak of 8%, grocery costs remain 28% higher.
"There’s nothing that (the government) can do to cut those prices,” said former BOC and housing agency economist David Watt. “Even if they did a long-term policy they might not get the credit that they might deserve."
Canada's dollar is also trading at the weakest in years, raising the cost of coveted winter getaways. The "loonie" could dive further if Donald Trump follows through on a threat of tariffs and major corporate tax cuts. (See: MNI INTERVIEW: BOC Faces Recessionary Risk On Tariff Hit: Lane)
For people staying at home, the average residence in Toronto and Vancouver long ago passed the million-dollar mark and household debt rivals national GDP at CAD3 trillion.
MAKING LITTLE DIFFERENCE
The Globe and Mail newspaper has reported the Prime Minister has already sought to recruit Mark Carney to fix the message.
“It’s very hard for them to change direction now, because you’d be admitting that what you have done previously didn’t work,” CD Howe President Bill Robson says. Governments have wrongly focused on short-term measures that often don't work, he said.
Canada's deficit of about 1% is a fraction of the U.S. shortfall and the government often touts the country's triple-A credit ratings. Yet spending has what experts call a disappointing near-term focus. Freeland Thursday passed a two-month sales tax holiday. (See: Canada Making Fiscal And Climate Policy Mistakes: Biz Council)
"They will not make much difference," said Sherry Cooper, aide to former Fed Chair Paul Volcker and chief economist at Dominion Lending Centres, a Canadian mortgage and leasing company. "Consumers everywhere seem to be concerned about their futures. That’s why so many incumbent governments are unpopular and voted out."