Euro recession clouds Flaherty's budget flexibility
Everything was going along just rosy, until….
An analysis from RBC’s Europe Economic Research division this morning reminds us of the tightrope that Canadian Finance Minister Jim Flaherty is walking. Next week’s Federal budget is going to make some headlines, with expectations of large cuts to government spending. But it’s more thoughtful than that.
Majority governments don’t have many opportunities to take major steps during a mandate, and 2012 is the year of choice if th government is going to satisfy the desires within the Conservative Caucus to shrink the government’s footprint. And yet, cutting government spending during economic uncertainty gets many economists up in arms. What’s our fav Fin Min to do?
Last December, Bank of Canada Governor Mark Carney warned us luncheon-goers at the Sheraton Centre that Europe “may well already be” in another economic recession. Over the past 90 days, the S+P 500 index is up a tidy 12% nonetheless. The news that Europe isn’t going broke (yet) seems to have trumped the potential for an economic slowdown…which usually sends equity markets lower.
This morning’s RBC report is focussed on weak Purchasing Managers Index figures, and what they mean for overall economic growth:
The euro area ‘flash’ PMIs for March were weaker than expected, with a material fall in the manufacturing index (47.7, from 49.0), and a broadly unchanged services reading (48.7, from 48.8). The decline in the manufacturing index reflects the corresponding indices for Germany and France both falling back below the 50 ‘no-change’ benchmark in March. These latest readings reinforce our expectation that the euro area economy is likely to have fallen back into technical recession in Q1/12 – although confirmation of that will not come until mid-May when the first official Q1 GDP data are published. However, although these survey readings are unambiguously weaker than the market (and ourselves) had been expecting, the implications for our growth forecasts are limited. We estimate that the latest euro area PMI readings, in isolation, are consistent with Q1 GDP growth of -0.2% q/q (which is our existing forecast). And at the national level the moderation in the German readings merely serves to remove some of the upside risk to our +0.2% q/q projection (indeed, the latest PMIs are now fully consistent with that forecast); perhaps the most significant news is from France, where the softer manufacturing PMI suggest a modest downside risk to our Q1 GDP forecast of -0.1% q/q. Overall, however, we continue to expect a shallow, short-lived recession in the euro area as a whole; these PMIs do not change that assessment, although the weakness of the March readings suggests that we will need to see a bounce in the PMIs in the next couple of months if our forecast for a return to growth in Q2 is to be fulfilled.
Sounds as though Governor Carney was right, although that comes as no surprise (see prior post “Governor Carney’s future political career looking good” Sept. 10-10). Minister Flaherty still has a tough job next week, and tightening the Canadian belt is certainly going to be part of his task on budget day.
I’ll be watching for 5 things in next week’s budget; some big, some small, all telling:
1. Meaningful cuts to overall government spending: Although departmental budget cuts of 5% may have been the basic target, I think Treasury Board Minister Tony Clement’s careful review process is going to turn up closer to 10% savings in many areas.
2. Restructuring Crown Corporations: There is some low-hanging fruit here should folks get into the nitty gritty and finish the job McD, Wilson and Maz started in the late 1980s. Should CMHC be taken public? Should Export Development Canada and the Business Development Bank of Canada be merged into a single Super Bank, headed by the top talent that EDC has assembled? These are just two of the more meaty Crown Corp. opportunities to be considered. Since BDC’s imperialistic ways continue to overlap with EDC’s necessary and truly complementary role, as is the only analysis following the execution of a “non-compete” between them last November, why force entrepreneurs to knock on two different Federal doors as they seek government help to grow their business? Why are there two offices, one for exporters and another for domestic finance, in a city the size of Drummondville with a population of 71,852?
A single, one-stop shop is more efficient for the entrepreneur, and saves taxpayers money. EDC has demonstrated its professionalism with the private sector and achieved clear financial success as it fulfills its mandate. BDC, not so much.
Rather than extending EDC’s new domestic powers one year at a time, fold BDC into the organization and formalize EDC’s proper role as the government’s sole Crown Corp. policy tool in the areas of finance, venture capital, insurance and bonding. The private sector will applaud, and the taxpayer will save the wasted G&A.
3. Reforming pension plan management: Low hanging fruit to some, “mice nuts” to others, but the multiplicity of federal pension plans (such as PSP, BDC, RCMP, DND, Bank of Canada, Canada Post, Port Authorities, etc.) is not the most efficient way to manage assets, as we’ve discussed previously (see prior post “Does Ontario really need five Pension Plans? part 2“ Dec 15-11).
4. MP Pensions: The sacrificies that some people make to serve in Ottawa can be brutal. A trained professional engineer is likely taking a pay cut to serve a couple of terms in the House of Commons. Is the MP pension an appropriate vehicle to compensate him/her for that financial sacrifice? Perhaps. Does it need to kick-in after 6 years, rather than, say, 8? Not necessarily.
If the government is going to deal with the perceived cost of the larger public service plans, don’t be surprised if they take a scalpel to their own. Don’t forget, Ministers Flaherty, Baird and Clement did away with pension plans for MPPs back in their days at Queen’s Park. I don’t expect that step to be taken, but a haircut may be coming.
5. A surprise: This budget may be the only chance to bring unique structural reform to the very size, cost and nature of the government as a whole. There are some very big thinkers working in important jobs in Ottawa right now, and they well know this may be their only chance in a generation to do something meaningful and transformational as far as “the system” is concerned. It won’t have been leaked (aka trial-balooned) as of yet, so I’m not thinking of the notion of extending the eligibility age of the CPP, for example. Something different, but important to people who’ve prepared for 25 years for this opportunity.
MRM
(disclosure: this post, as always, reflects a personal Opinion and is not meant to represent the views of the TPA, its Board/Staff or the federal government)
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