November 7, 2012 / 8:43 PM / 6 years ago

Canada has options if U.S. fails to avert "fiscal cliff"

OTTAWA (Reuters) - Canada will fall into recession if Washington does not reach a deal by year-end to avert the so-called fiscal cliff, but the Canadian government and central bank could provide extra stimulus if necessary, policymakers said on Wednesday.

Canada's Finance Minister Jim Flaherty speaks during Question Period in the House of Commons on Parliament Hill in Ottawa October 31, 2012. REUTERS/Chris Wattie

Unless the White House and Congress agree on how to cut the U.S. budget deficit, a $600 billion package of tax increases and spending cuts kicks in automatically at the end of 2012 and would threaten U.S. economic growth.

“Were the entire fiscal cliff risk to become reality, the effect on U.S. GDP, according to the Americans themselves, would be 4 to 5 percent, which would put the U.S. economy into recession quite quickly and the Canadian would follow shortly thereafter,” Finance Minister Jim Flaherty told reporters in Ottawa.

Canada’s economy recovered from the global recession faster than that of the United States, but it remains heavily reliant on trade with its neighbor, which buys three-quarters of its exports.

Bank of Canada Governor Mark Carney said policymakers would have several options to protect Canada from fiscal calamity south of the border.

“We can provide stimulus on the monetary side, the government could take measures, other things could happen, but we don’t need to do that in anticipation of the Americans not coming to an agreement, an agreement that is in their own interest,” Carney told the Canadian Broadcasting Corporation in an interview.

“We’re going to watch this closely; we’ll react if necessary but we’re not going to react to a hypothetical at this stage,” he said.

Carney said President Barack Obama has a “strong mandate” to engage his opponents on the fiscal cliff issue, helped by the Democrats holding onto a majority in the Senate.

The central bank’s forecast of 2.3 percent economic growth in the United States next year assumes a drag of 1.5 percentage points from fiscal tightening on the expectation some kind of bipartisan deal is struck. But Carney said that prediction was highly uncertain.

As he headed into a November 4-5 G20 meeting in Mexico City on Monday, Flaherty warned for the first time about a potential recession.

He also said he was confident that whoever won Tuesday’s presidential election would succeed in brokering a deal with Congress, but not without some brinkmanship.

“They may not deal with it until the 11th hour and the 55th minute, but I expect that they’ll do it just as they dealt with their banks in 2008,” he told reporters.

Reporting by Louise Egan; Editing by Janet Guttsman and Steve Orlofsky

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