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Canada a victim of US ‘super committee’ pratfall: analysts

Canada’s economy and jobs performance could become a victim of US politics, analysts say.


November 23, 2011
by CANADIAN PRESS

OTTAWA: Canada’s economy and jobs performance could become a victim of US politics, analysts say.

Just how much Canadian impact the so-called super committee’s failure to find up to $1.5 trillion over 10 years in government spending cuts will have is difficult to quantify, since the process can still be rescued and it is not known whether the fallout has doomed other measures before Congress.

But the failure is also a fresh indication that political dysfunction, both in Europe and the US, is becoming a major, contributing factor to the global economic malaise.

“The big challenge is all the big risks to the economic outlook right now have a political dimension, and you do not know how politics will unfold,” said TD Bank Craig Alexander.

“What we worry about is the possibility of a feedback loop where you go from the political crisis to the economic and financial crisis.”

US economist Peter Morici of the University of Maryland, who has followed Washington politics for years both on the outside and inside at the Trade Department, said a deal could still be cobbled together, but he is not hopeful.

“Genuine progress is not possible,” he said in a paper, “because the principals (politicians) won’t accept the facts.”

In Europe, Germany again threw cold water on calls – including from Canada – for a big one-time fix to the sovereign debt crisis, with one official declaring there is no “bazooka” to pull out of the bag and overwhelm the problem.

While Europe remains the world’s – and Canada’s – biggest risk factor, Alexander believes the current gridlock in Washington also has the potential to derail the US economy all on its own.

The first shock could come as early as January unless the deeply divided Congress agrees to renew billions of dollars in payroll tax cuts and emergency unemployment benefits.
The next shock is set to strike in 2013 when if by then there is no budget deal, it will trigger automatic deep cuts to military and discretionary spending.

Economists have calculated the hit to US economic growth could be as large as two percentage points in 2012, and three percentage points after 2013.

The US has downgraded its third-quarter growth by half a point to 2%. According to the Bank of Canada, the US economy is entering a precarious period in which any shock would likely tip it back into recession.

“Certainly that will have an impact on Canada,” said Avery Shenfeld, chief economist with CIBC World Markets.

“One reason why the Bank of Canada was so concerned about growth (next year) is its working assumption is that those measures (US stimulus) will come to an end.”

Lower growth in the US hits directly at Canadian exports of autos, machinery, aerospace and lumber because of reduced consumer demand.

As well, a recession in the world’s largest economy would lead to increased volatility in global equity markets, depressing the net worth of Canadians’ investments and pension funds.

Already, the prospects of reduced military spending south of the border are rippling through Canada’s export oriented aerospace and defence sector.

CIBC analyst Michael Willemse said Montreal-based CAE Inc., which provides modelling, simulation and training products with military and civilian applications, has about $28 million in sales at risk from US defence cutbacks. That’s a small share of revenues, but just the threat of upcoming cuts has played a role in CAE losing about one quarter its market value since June, the analyst said.
© The Canadian Press 2011