Canada Shares In U.S. Economic Woes, But Is Canada's Response of Pushing Energy Development Going to Push Divisive Political Regionalism?

By Keith Edmund White 
Editor-in-Chief

The global economy slowing, and the United States economic motor slowing too.  One result:  Canada’s economic growth has stalled as well.  But is Canada, with its low-debt and resource-high economy, more able to respond to troubling economic times?  Perhaps.  But a year-long study by a environmental thinktank shows that Canada’s conservative government active support for resource-development comes at a cost—and could sharpen Canada's regional tensions.  Then, again, anything that gets Quebec and Ontario on the same side can't be all that bad...right?

The AP sums up the gloomy global economic picture well:

Already hobbled by Europe's debt crisis, the world now risks being hurt by slowdowns in its economic powerhouses. 

 The U.S. economy, the world's largest, had a third straight month of feeble job growth in May. High-flying economies in China, India and Brazil are slowing, too.

Naturally, news of the U.S. jobs data has dominated the news coverage.  But it also bears mentioning that Canada’s relatively well-performing economic has hit a snag too.  Canada's economic growth last quarter was a meager .9%, well below the government forecast of 2.5%.

The immediate result?  Canadian interest rates will not raise .  And while low rates can help spur growth, there is a price—taking money away from safe investments bonds and into the equity market to have investors achieve their desired rate of return.  And, as documented in the Globe and Mail, this has a particular impact on soon-to-be retirees:

It was just the latest sign that the new retirement would not be like the old: Defined benefit plans have given way to less generous defined contribution plans, stock market losses have pushed out many people’s retirement horizons, and the huge run-up in home prices that translated into a retirement bonanza for retirees will likely not be repeated – in fact it has meant bigger mortgages and less for retirement for follow-on generations.

But when it comes to responding the a possible double-dip, Canada does have one important advantage over the U.S.:

He said Canada, with its solid domestic economic fundamentals and its majority government, is "in a position to act" on the economy.

"Our fiscal situation is sound," he said, and Canada has fiscal "room to move," should a downturn encroach on Canada's relatively robust economy.

But will Canada's Conservative actually push a stimulus if the economic dips back into recession.  Sure they have the fiscal space to pursue such a strategy, but will a government that's pushing controversial cuts to government spending be willing to reverse course?

For right now, Conservative Prime Minister Stephen Harper does not see public spending as the way to spur growth in Canada.  Instead, Harper is pushing resource development—an understandable strategy, since it offers growth and minimal political blow back in the short-term.  (Note:  Environmental groups are up in arms, but it doesn't look like environmental concerns are going to sway Canada's national politics in the near-future.)

But will there be a steep economic and political price to Harper's energy push in the medium or long-term?  Yes, according to a recent study by the Pembina think tank, a Canadian energy think tank.  Thestar.com reports on the study that emphasizes the costs of quickly--if not hastily--turning Canada into a resource-heavy economy: 

The symptoms are an inflated dollar and provincial tensions caused by a national economy that is increasingly tilted toward supporting the resource boom in northern Alberta.

It is a grave condition, but it is treatable if the federal government acts soon, says the Pembina Institute, an environmental think tank.
 …

It also follows NDP leader Thomas Mulcair’s charge that Canada is suffering from “Dutch Disease” — a 1960s phenomenon in which the Netherlands invested heavily in offshore oil and suffered devastation in its manufacturing sector.

Similar problems are occurring in Canada’s manufacturing sector — particularly in Ontario and Quebec — but Mulcair’s simplistic diagnosis ignores the impacts of a weak economy in the United States and rise of China as a global manufacturing hub, the Pembina report says. 

 “It’s raised this issue to a level of both political and public prominence that is necessary. It has triggered a divisive debate that’s premised more upon rhetoric on both sides as opposed to really digging into the details of what’s happening and what can be done,” said Dan Woynillowicz, co-author of the report.

…

Coupled with the collapse of manufacturing jobs in Ontario and Quebec, the booming oilpatch, backed by a supportive federal government, threatens to cleave the country in two, Woynillowicz said.

It is not hard to envision a reverse of Alberta’s grievances of the 1980s over a National Energy Policy that subsidized western energy to support the needs of the rest of the country, he said. The western alienation phenomenon gave rise to a political protest movement that, years later, landed Prime Minister Stephen Harper in power.

“I actually think right now we’re potentially seeing that exact same dynamic setting up, but with the roles reversed — with the West being seen to be supported by the federal government in pursuing their interests at the expense of central and eastern Canada,” Woynillowicz said.

…

He said Wednesday that what he would like to see is a more sustainable development of Alberta’s bitumen, with a strategy that would bring jobs and money to other parts of the country rather than simply shipping the raw products to refineries in other countries.
Natural Resources Minister Joe Oliver said Mulcair’s “real agenda” is to introduce a carbon tax, stop development of the oilsands and put thousands of jobs in jeopardy.

The Pembina report makes what the authors described as modest recommendations, including eliminating subsidies for the oil and gas sector, studying the impact of the oilsands on the Canadian economy as well as the problem of regional competitiveness under a high Canadian dollar, creating a national energy strategy and using the corporate taxes collected from oilsands operators to ease the transition when the resource is used up.

I would  link to Pembina’s website for more information, but Pembina is participating in an internet blackout to protest against the proposed Conservative budget.