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article imageOp-Ed: Canada's deflating economy

By Bill Tufts     Jun 1, 2011 in Business
Hamilton - How has Canada's economy done since the recession began in mid 2008?
Without government borrowing huge amounts of money to bolster the economy, it has been merely bad rather than disastrous. However, the trend cannot continue
The two major components of a countries economic performance are the measurements of growth in the labour force and growth of GDP. By both these measures Canada's performance is lackluster. If not for government spending Canada's growth would be negative. The only thing buoying the economy is government spending and this has come at the cost of more government debt.
Think of our economy as a big balloon. More and more money goes into it and the economy grows. This growth is generated by consumer demand, housing investment, corporations building facilities and exports products. These are the productive type of activities that drive our economic growth. There are other items included in the GDP that are negative but generate positive GDP numbers. These items include government spending. Take healthcare as an example, a person in their last few months of life may consume tens of thousand in healthcare which is all considered GDP.
Our economy is now a balloon that is deflating and some economists predict that it will deflate for several years. One of the best books putting forth a detailed analysis of what to expect is The Age of Deleveraging by Gary Shilling. Also Harry Dent provides some very credible reasons based on the consumption curve for several years of slow economic growth. Both economists provides good solutions to investing in times of deflation.
Wikipedia provides us with a good description of GDP. It is the value of the goods and services produced by the economy. Included in this is government spending.
GDP = private consumption + gross investment + government spending + (exports − imports), or \mathrm{GDP} = C + I + G + \left ( \mathrm{eX} - i \right )
Canada's GDP
Canada's GDP has grown very marginally since the start of the recession which began in the middle of 2008. By the end of 2008, Canada's GDP was at $1.60 Billion. By the end of 2010 it had grown to $1.62 Billion. From the end of 2008 to 2010 the economy grew by about $21billion.
The reason for the minimal GDP growth that we had was government spending increased over this period and government debt increased by about $139 billion. Without governments borrowing to generate growth, the economy would have actually shrunk by $108 billion.
Labour Growth
When we look at labour growth the numbers become even more dismal.
When we go back to June 2008 there were 14.52 million workers in Canada. of these 4.0 were employed in the "goods-producing sector" and 13.1 were in the "service sector".
Employment numbers for
Selected industries ('millions) ...... '06/08 .....'04/11
Manufacturing ............................... 1.98 ..... 1.78
Government Based
Education ...................................... 1.19 ...... 1.24
Health ............................................ 1.89 ...... 2.07
Public Admin (Government) ............ .92 ........ .96
Total Government based ................. 4.0 ...... 4.27
By April 2011 the number of workers had risen to 14.60 an increase of about 80,000 workers. From 2008 to April 2011, manufacturing lost 200,000 jobs and these were replaced by 270,000 government based jobs.
Government Debt
The government is in a dilemma now. Despite the rosy forecasts they like to create showing how well our economy is doing there are reasons for major concerns.
Government spending cannot continue to increase especially when it is financed by debt. The recession was started by economies overloaded with debt. Rather than deal with the imbalances government decided to increase spending "grow the economy" and create more debt. Now we are in a predicament that there are no tools left for governments to throw at the economic problems.
Governments have tried to maintain the economy on a steady keel but debt financing for economic growth is no longer possible.
The original cause of the recession too much debt for consumers. That debt burden has now been increased by governments. As of the end of 2010 Canada's net debt had grown to $582 billion, up from $516 billion two years earlier. The provinces have not done any better. They have increased debt from $315 billion to $388 billion.
Combined all levels of government have increased debt by over $139 billion. Substantially more than the GDP growth of $21 billion. This makes Canada on of the most indebted nations in the world. If we were a PIIG we would be right in the middle. with our 81% debt to GDP ratio.
Experiment Failed
The government's attempt to continue economic growth by borrowing has failed. Canada's economy is going nowhere and we are farther behind because of government debt.
The future does not look much better for Canada's economy.
Canada's growing entitlements and healthcare costs are based a continually growing economy. As Canada divert more of it's resources into wealth consumption spending rather than wealth generation the vortex created will be harder to pull out of.
We are into a new paradigm as Canada's past economic growth was based on consumer spending. This trend is over and strong headwinds will slow us down.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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