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Bennett Jones Fall 2019 Economic Outlook

By David A. Dodge, Richard Dion, Serge Dupont, John M. Weekes, Michael Horgan and Valerie Hughes of Bennett Jones

This is a special edition of the twice-yearly Bennett Jones Economic Outlook. In it, as always, we review the global economic and trade context and the short-term outlook for global and Canadian growth. In addition, we examine five key policy challenges that the Government of Canada and the minister of finance will confront and deal with in a new mandate.

Government and businesses today face a complex interplay of political, geopolitical, macroeconomic, financial, and structural factors:

  • The United States has discarded large parts of the “Washington consensus” in favour of “America first” unilateralism, compromising open markets and the post-war liberal economic order. Brexit and political struggles worldwide make clear that this challenge to the established order is deeper and more pervasive than the product of an erratic U.S. administration. 
  • The U.S. and China tariff war—if muted by a short-term détente—is not only unsettling the global economy today; it is an early manifestation of a more profound geopolitical and economic struggle that may disrupt global supply chains and bring down a “silicon curtain” across the Pacific. The wider global scan is of little comfort to investors.
  • Structurally, demography and low productivity growth are constraining growth potential in advanced economies while China is also slowing down as a normal phase of its development. 
  • As the fourth industrial revolution introduces new applications and services at unprecedented speed and creates new opportunities, it is disrupting business models, industries, labour markets, and the distribution of income and wealth. 
  • Meanwhile, nations, businesses and investors have to factor climate change and its related risks and uncertainties into their decisions and planning.
  • Amid this unprecedented uncertainty, the global economy is underperforming. Despite historically low—in many cases negative—interest rates, depressed trade and business confidence are keeping investment down.
  • Ten years into a recovery, any number of factors could trigger a global recession and/or a re-pricing of risk in financial markets that would expose the vulnerabilities of heavily-indebted corporations and governments. 
  • In this event, central banks would have limited firepower and their interventions may be less effective than in prior downturns. Where there is room to manoeuver, aggressive fiscal policy may be needed to bolster demand and re-ignite growth.
  • Globally, existing trade and geopolitical tensions may make the coordination of such efforts more difficult than in 2008 when the G20 was able to come together in common cause. 

There is no playbook for a period of such global political and economic risk and uncertainty. This is particularly true for an economy like Canada that has depended so critically on both strong, cohesive multilateralism and economic integration with a reasonably predictable and reliable United States.

In the short term—e.g., the next two to three years—the best baseline projection is one founded on global growth slightly below potential, with low inflation and interest rates, and only gradual convergence to potential. However, the risks to this projection—for the global economy as well as for Canada—are decidedly tilted to the downside. 

For the medium to long term, Canada cannot simply ride a global wave and expect a satisfactory growth trendline. Canadians and their governments must make a concerted effort to seize opportunities in a world of change and disruption.

As it articulates an agenda, the government must be concerned with the three key goals of economic policy:

  • Growth: expanding potential growth and exerting leadership to position Canada on the winning side of global change.
  • Stabilization: being ready to respond to a potentially severe recession or financial disruption.
  • Distribution: being attentive to the distribution of costs and benefits of adjustment with a view to facilitating, not impeding, change.

For the minister of finance and Cabinet colleagues, there is a responsibility to ensure timely and effective responses to the global environment with a range of policy levers, including:

  • Macroeconomic policy: identifying the right fiscal and monetary policy anchors and ensuring the cohesion of the macroeconomic framework to underpin confidence.
  • International economic diplomacy: sustaining a commitment to multilateralism while strengthening bilateral relationships and protecting against harmful unilateral actions.
  • Tax policy: ensuring that the taxation framework supports investment, innovation and Canada’s global competitiveness while also aiding adjustment to change.
  • Financial sector policy: ensuring that the financial system is sound and that it evolves in step with innovation in the digital economy to deliver better services to consumers and small businesses and to sustain the competitiveness of our financial services industry.
  • Climate and energy policy: identifying paths that make a contribution to a global climate challenge while also advancing Canada’s interests as a responsible energy producer and exporter.

On all of these files, and others, the Government of Canada does not hold all the cards nor all of the answers. A “Canada first” effort must involve other levels of government. It must also draw on the participation of business leaders whose firms are on the front line of global competition and on the frontier of technology and that individually must respond to the same global forces. The backdrop of uncertainty and disruption demands a national response that mobilizes, with a sense of urgency and a long-term perspective, leadership across the public and private sectors. 

In my 50 years of active engagement in economic policy and public finance, I have studied, witnessed and participated in many periods of profound economic change—perhaps none as daunting as this one. As a Canadian, I have taken immense satisfaction from the fact that our governments and our businesses have been able over time to take action and to harness, not resist, change. In some places and at some times, we have been leaders. We have the resources and the capacity to lead again: to do better in a changing world, to build on our strengths, and to address key gaps.

This is my 21st Bennett Jones Economic Outlook and the last that I will lead. I thank my colleagues for their support and collaboration and the firm’s clients and friends for their engaging discussions. The conversation will no doubt continue in the months and years to come as Canadian governments, businesses, and citizens, seek and find new answers to questions old and new.

Compliments of Bennett Jones (USA), a Member of the EACCNY