January 25, 2016 / 8:45 PM / 4 years ago

Trudeau's Canadian honeymoon cut short by oil crash, economic woes

TORONTO (Reuters) - With growth fading, oil prices in freefall and a currency having touched a 12-year low, Canada’s new Prime Minister Justin Trudeau faces an early end to his political honeymoon, confronted by an economic slump with no easy exit.

Canadian Prime Minister Justin Trudeau arrives to speak about a Saskatchewan school shooting during a news conference in Davos, January 22, 2016. REUTERS/Ruben Sprich

While voracious demand from China for its commodities helped Canada escape the worst of the 2008 financial crisis, the communist-run country’s diminished appetite and a global oil glut have turned into a massive headwind for Canada.

The parallel decline of oil prices and the Canadian dollar, which the central bank governor describes as following each other like “railroad tracks”, is bringing both economic and political pain.

With a comfortable majority from last October’s election, Trudeau’s Liberal government will have no problem passing laws in Parliament.

But his political capital will melt away quickly if he mishandles his first major test over the economy. It would damage provincial allies and the Liberal party’s prospects in the 2019 election.

Trudeau, 44, branded as a lightweight by opponents in last year’s campaign, will have to ensure that the oil shock does not trigger vulnerabilities such as Canada’s record high household debt levels and long-in-the-tooth housing boom, creating vicious cycle of job losses and further weakness.

At the World Economic Forum in Davos, Switzerland last week, Trudeau was asked at one press conference about what he was accomplishing at parties with celebrities Kevin Spacey and Bono when many Canadians are unemployed or fearful about their jobs.

“My encouragement of CEOs and investors to think about Canada when they make investments is something I know is going to resonate in the coming months,” Trudeau said on Friday.

Such investment is sorely needed. The slide in prices – Canadian oil sands crude fell 60 percent from a year earlier to trade below $14 a barrel last week – has led to weaker business investment and big job losses in the Western oil producing provinces of Alberta and Saskatchewan. 

The impact has been felt on the other side of the country, where workers who migrated from Atlantic Canada to the oilfields return home in droves, unemployed.

The central bank’s oft-stated hope that rising non-energy exports would drive the economy and help offset the oil crash has not materialized. This is partly because in the manufacturing center of Ontario, auto companies have shifted plants and work to lower-cost jurisdictions such as Mexico.

“There is no doubt that Trudeau has come to power at a bad time,” said Earl Fry, political scientist at Brigham Young University in Provo, Utah.

In Quebec, the provincial government bailed out struggling planes and train maker Bombardier Inc for fear of losing 40,000 aerospace sector jobs in the province.

   “The engines for growth in Canada are really few and far between,” said David Rosenberg, chief economist with Gluskin Sheff + Associates, who predicted the U.S. housing crash while at Merrill Lynch.

The Bank of Canada lowered its forecast for 2016 growth yet again last week, to 1.4 percent from 2.0 percent in October.

    While the currency’s decline against the greenback will help exporters and inbound tourism, it has sent supermarket costs soaring.

“If the CAD$ gets any weaker, we might be able to buy groceries with shiny rocks,” tweeted at @joshlandline.

The Canadian economy, which endured a mild recession in 2015, saw zero growth at the start of the fourth quarter. A government projection in December showed a planned tax hike on the rich will not cover the cost of a promised middle-class tax cut.

“The very time that there’s a need for government to reasonably provide a safety net for people who are at risk, is the very same moment where the coffers are going to be the most empty,” said Kevin Uebelein, CEO of Alberta Investment Management Corporation, the C$90-billion ($63.28 billion)provincial pension fund.


For his part, Trudeau remains upbeat, touting economic diversification “after a time in which we had put all our eggs in one basket”, he said on Jan 14.

But it will be a Herculean task. And the government’s relentless optimism has raised eyebrows.

“I don’t know that (the economy) will shift fast enough to compensate for the C$50 billion that has been sucked out of our economy as a result of what has happened to commodity prices,” said Darrell Bricker, chief executive at pollster Ipsos Public Affairs.

One attendee at a budget consultation session with the Canadian finance minister on Jan. 12 said they found his description of the economy’s fundamental strengths worryingly at odds with reality.

Asked for a response, a government official said: “No one wants to see the finance minister screaming and pulling his hair out in public.”

The Liberal government, which ended 10 years of Conservative rule, vaulting Trudeau into the office once held by his father, Pierre Trudeau, is under pressure to go deeper into deficit than the up to C$10 billion a year it has proposed.

Preliminary conversations are focused on a 2016/17 deficit of between C$10 billion and C$20 billion, Liberal officials said. Any spending will not happen before a budget, expected in March or April.

A former central bank governor has suggested Canadian federal and provincial governments run combined deficits of up to C$40 billion and even the Bank of Canada is seen as putting the ball in the government’s court. In holding rates steady last week, the central bank pointedly noted that it had not yet factored in “the positive impact” of fiscal measures promised by Trudeau.

Economists such as Gluskin Sheff’s Rosenberg said Trudeau should “damn the torpedoes” and run deficits of up to C$30 billion, which if growth recovers might not even raise Canada’s debt-to-GDP ratio, a major consideration for the government.

“After all the saving for the rainy day, well, the rainy day is here,” Rosenberg said.

Additional reporting by Matthew Scuffham in Toronto and David Ljunggren in Ottawa; editing by Grant McCool

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