recessionThe Bank of Canada (BoC) has now acknowledged that the Canadian economy likely contracted by 0.6% from January to March, and by 0.5% from April to June. With this, they join a chorus of private-sector analysts in acknowledging what only recently seemed unthinkable – Canada, for the first time since the 2008-2009 financial collapse, has entered into a recession. This is a far cry from the Bank of Canada’s January forecast, which predicted that the economy would grow by 1.5% in the first half of 2015 and by 2.1% throughout 2015 as a whole.  This latter figure has now been reduced to an even more meagre 1% growth rate for all of 2015. In January, it was argued that “The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar and the Bank [of Canada]’s monetary policy response.” Six months later, not a single one of these predictions have borne themselves out. In fact, they have all proven fantastically wrong. The bourgeois economists have shown yet again that they cannot see even one inch beyond their noses.

A new recession may serve as a shock to some economists, but for millions of working class Canadians it comes as no surprise. Indeed, so many of them find it hard to believe that the first recession ever really ended. In January of 2014, the Toronto Star wrote that “Despite what Statistics Canada says, just over half of Canadians believe the country is in recession, according to an annual outlook survey by Pollara.” This is despite the fact that the economy was then growing at a faster pace than it currently is. But how can they be blamed? The Star article continues: “Jobs are the big worry, the survey found. A record high of 34 per cent of Canadians surveyed, just over a third, are concerned an immediate family member will lose his or her job this year. That’s up from 25 per cent from last year’s results, and even higher than the 32 per cent registered following the 2008 recession.” Workers may not have complex methodologies, but they do have what no economic data could ever accurately capture – and that is called real life experience.

Contrary to the bewilderment of many mainstream economists, the Marxists have not been surprised. For years we analyzed the shaky basis of the so-called recovery in Canada and have underlined the inevitability of a new economic downturn at a certain point. In our political perspectives document for this year, in our analysis of the underlying features of the Canadian economy and the state of the world market, we concluded that “It looks like we’re set to enter a new round of crisis within the short term.” We highlighted the crisis in the oil sector, the high levels of consumer debt, capital hoarding and the housing bubble as all indicators that things were not set to get better, but much worse. This means that any serious analysis must start from the understanding that capitalism will be unable to provide improvements for workers for a prolonged period of time.

Causes of the Recession

Unsurprisingly, the oil collapse has served as a major factor in Canada’s recessionary decline. As noted in The Globe and Mail:

“Even if the biggest damage from the plunge in oil prices was already absorbed in the first half of the year, the lingering drag on the country’s economy is far from over. Capital spending in the oil and gas industry is expected to plunge 40 per cent this year. Excluding residential construction, first quarter business fixed capital formation – the key measure of how much businesses are spending on facilities, equipment and machinery – fell at an annualized rate of more than 17 per cent from the fourth quarter, and was the key contributor to the GDP decline. And after oil prices managed to rally over the spring, they have started to slide again – down nearly $10 (U.S.) a barrel in the past month.”

Economists were optimistic that oil prices would stage an increase following their dramatic decline at the end of 2014. As of yet, this has not proven to be the case. Indeed, all signs point to a weakening in the price of oil for the near future. As Goldman Sachs’ commodities head Jeff Currie said “I would argue we’re in a slump that could take five or 10 years” to reverse, due to the price of oil remaining low for years to come.

The persistent slowdown in China has weakened the demand for Canadian crude, and OPEC powerhouse Saudi Arabia has shown no signs of cutting production anytime soon. Iran has also re-emerged as a factor in global oil production, owing to its landmark nuclear deal with the US and five other countries. The lifting of sanctions on Iran will in turn imply an increase in the global output of oil, depressing prices as a result. A recent article in the National Post takes note of this fact: 

 “…sooner or later, Iran coming online will only add to a world swimming in petroleum. The country has 10 percent of the world’s reserves, but accounts for only four percent of   production, and with the opening to foreign investment that will surely grow. And that won’t do anything for crude prices or for the Canadian energy sector in the long term.”

None of this bodes well for the oil barons in the long or short term, which in turn does not bode well for the broader, resource dependent Canadian economy. If there was once a time when the economy was ballooned by the oil sector, that time no longer exists.

The real story, though, is not oil but manufacturing. The non-energy sector of the economy had been heralded as the last remaining hope for a Canadian rebound. The logic ran as follows: a collapse in the Canadian dollar would make manufactured goods cheaper to purchase on the world market. This would hypothetically lift Canadian exports, and give a boost to the broader economy. The Bank of Canada’s Stephen Poloz echoed these sentiments when he said in late 2014 that “Canada’s economy is showing signs of a broadening recovery. Stronger exports are beginning to be reflected in increased business investment and employment.” Unfortunately for Mr. Poloz, the exact opposite has happened. A recent article in the Globe and Mail notes how “Non-energy exports have fallen in three of the past four months. And while average monthly energy export volumes this year are actually up from last year, non-energy exports are down nearly 2 percent.” In essence, non-energy exports have behaved in exactly the opposite way in which the Bank of Canada foresaw. The reason for this is simple: despite predictions for rapid growth in the United States, their economy actually contracted in the first quarter of 2015, significantly weakening demand for Canadian exports. The implications of this decline have proven much starker for Canada than originally anticipated. In March of this year, Canada racked up its largest trade deficit in recorded history – an incredible $3.5 billion. Statistics Canada estimates that in the first five months of 2015 alone, Canada accrued a trade deficit amounting to $13.6 billion. These figures are not only massive – they are historically unprecedented. As was mentioned above, energy exports have seen a slight resurgence since the start of the year, meaning that these figures are largely attributable to non-energy/manufacturing exports. This has thoroughly dashed any remaining hopes of the so-called “manufacturing rebound”.

An Inadequate Response

The Bank of Canada has responded to the recession by lowering its key interest rate from 0.75 to 0.5 per cent. The last time that the interest rate was this low was in the depths of the Great Recession; and there remains the possibility that it may still fall further. This can only be read as desperation on the part of the Canadian bourgeoisie, who have exhausted all other means at their disposal to revive the market. Almost no one, including bourgeois analysts, believes that this mild monetary stimulus will jumpstart the Canadian economy. As Charles St-Arnaud, the executive director of Foreign Exchange Research and Economics said, “Household debt in Canada is at an extremely high level, so it’s not clear how much stimulus you would get from a rate cut.” The interest rate was already lowered in January from 1 0.75 per cent, but it may as well have never happened. The rate cut did not prevent the economy from contracting in the following two quarters, and it is highly unlikely that it will prompt significant growth going forward. Monetary stimulus as a counter-recessionary measure has more or less been exhausted. Global interest rates are already at historic lows, and there is little room for them to drop further.  

The only fuel that a lower interest rate can give is to an already astronomical buildup in consumer debt. The major banks have taken a cue from the Bank of Canada to lower their own interest rates, which are also at historic lows. As noted in the National Post, “Toronto Dominion Bank was the first to cut its prime lending rate, slicing off 10 basis points to 2.75 percent. Later Wednesday, Royal Bank of Canada and Bank of Montreal followed, with both shaving their prime lending rate by 15 basis points to 2.7 per cent.” The ratio of household debt to average income reached 163.3% in the first quarter of 2015, and was largely driven by the unabated race to the bottom in lending rates. This is already at a level similar to the US before its housing market crash that triggered the financial crisis. A further drop implies greater levels of consumer borrowing, and an even greater level of unsustainable household debt. This is of particular importance in relation to Canada’s housing market. Stephen Poloz himself admitted “Of particular note are the vulnerabilities associated with household debt and rising housing prices.” He went on to acknowledge that the recent cut in interest rates “could exacerbate these vulnerabilities”. Indeed, by the Bank of Canada’s own calculations, the Canadian housing market is overvalued by anywhere from 10 to 30 per cent. As high as that is, it may very well be an underestimate. German-based Deutsche Bank estimates that the market may be as much as 63 per cent overvalued, saying in a report that “Canada is in serious trouble.” Whatever the figure, there is hardly disagreement over the central fact – that Canada’s housing market is one of the most overvalued in the world, and that it is unsustainable. The question is no longer whether or not a bubble exists, but how long until it bursts. 

Conservatives Downplay Fallout

The Harper Conservatives have underplayed the recession in Canada, worried about what it could mean for them in the federal election. This has at times meant denying that there is a recession at all. “We’re not in a recession,” were the words uttered by Finance Minister Joe Oliver at an event on July 3 – a time at which most private sector analysts had forecasted a recession. In the spirit of Stephen Poloz, he went on to say that “We expect solid growth for the year, following a weak first quarter.” The Conservatives have proven so desperate to hold on to power that they are even unwilling to admit that their budget surplus may need to be revised! To quote Mr. Oliver again, “I’ve discussed this of course with my finance officials and we’re confident that we will see a $1.4-billion surplus this year. We are comfortable analyzing the data, that we will achieve that budgetary surplus.” This was a budgetary surplus based not only a strengthening economy, but on an increasing oil price. Neither of these things currently exist. To call this forecast anything but fantasy is all too mild. And sure enough, this perspective was proven to be false as the Parliamentary Budget Officer released its fiscal analysis on July 22nd revealing that the federal government is on track to run a $1 billion deficit this year. This is in spite of the billions that the federal government received this year for the sale of its shares in General Motors.

A Never-Ending Crisis of Capitalism

While pundits may say they see light at the end of a never-ending tunnel, the bourgeoisie themselves are far less deluded. Their outlook can be measured by the tightness of their wallets – which is very tight indeed. Canadian corporations are now sitting on cash reserves exceeding $600 billion – money they are unwilling to invest due to the moribund economic climate.

Laggard business investment is not only a phenomenon seen in Canada, but across the capitalist world. According to the International Monetary Fund, investment in fixed assets across all industrialized countries is an astonishing 25 per cent below where it was on track to be before the 2008 financial crisis hit. This is more than just a bump in the economic cycle. What this shows is the bourgeoisie’s complete lack of faith in their own system. They do not speak in words, but with investment – or lack thereof. As the old saying goes: “money talks”. And what is their money saying? Simply put, that things haven’t improved, and that the crisis is far from over. Herein lays the true outlook for the Canadian and world economy under capitalism.

After seven years of austerity, Canadians have been rewarded for their sacrifices, not with growth, but with a fresh crisis. This puts to rest the lie that the cuts were necessary in order to “save” the economy. In reality, the only thing that austerity “saved” was the bankers and capitalists who crashed the economy in the first place – a price that working class people are still paying for. Canadian capitalism is now running out of things to stand on. The pillar of oil has already collapsed, while the pillar of manufacturing is having trouble proving its own existence. The housing market is teetering on the brink of collapse, which could lead Canada into a slump deeper than the one it currently faces.

There is clearly no way out under the existing system. The problems affecting the Canadian economy, from weakening demand to slowed investment, are part of the global crisis of capitalism combined with the specific imbalances within Canada. That is why Canada has entered recession before the majority of advanced capitalist economies. Workers everywhere are now left to deal with the endless spillover effects of the Great Recession – a crisis created by capitalism, and one which the system has been unable to solve for seven years. In reality, it can never be solved under the rule of the bosses. There is no reason why workers should have a shred of faith in them to provide a solution, when they themselves hold the key to a better, socialist world. The reserves of wealth accruing dust in vaults could be used to create jobs and fund whatever things people may require, if only it were under their control and not the capitalists. A rational, democratically planned economy could achieve what the market system could not in 100 years, and make it so recessions are nothing but memories of a past era. A world like this is not only a possibility, but a necessity if we are to ever escape from this endless crisis. We might say that our economic forecast reads as follows: capitalism is in its death throes, and a socialist world hangs over the horizon.