MLI Senior Fellow Linda Nazareth in The Globe and Mail: Canada lucky to have options if economy slows

October 19, 2012 ? In yesterday?s Globe and Mail, MLI Senior Fellow Linda Nazareth discusses the policy options Canada still has in?its toolbox should the?economy slow. Full column below:

It is time to talk about the next global recession. No, it is not a certainty, and in fact it probably isn?t going to be a global recession anyway. What it?s likely to be is a sort of checkered recession: some countries are going to be hit hard, and some are going to be hit just a little

The last time around, in 2008, we had what seem in hindsight to have been a luxurious selection of policy tools to throw at the problem. Government spending, interest-rate cuts, non-traditional policy initiatives ? all were available, and all were used.

Flash forward four years and the options are severely limited. Government spending? Not if you are on the (ever-longer) list of countries risking a ratings cut. Interest rate cuts? Not if your benchmark rate is already zero (hello U.S., U.K.). On the plus side, most of the developing countries do have a little give in their monetary policy, and in the coming weeks we may find that many are willing to risk inflation in order to put in some stimulus. India, in particular, is on that list. Commodity-dependent Australia has started to cut rates too.

In the U.S., the Federal Reserve is still dealing with the effects of the 2008 crisis, with its one-two-three rounds of quantitative easing. Interest rate cuts are out of the question: the benchmark interest rate is already effectively zero. As for fiscal stimulus ? well, avoiding the fiscal cliff is ambitious enough right now.

And now let?s look at the Bank of Canada. Canada was doing so well pre-global crisis that the Bank actually tightened policy a bit through 2007, which had left the target for the overnight rate at 4 per cent. It started to cut rates in early 2008, then cut them more rapidly as the crisis deepened. By March, 2009, the benchmark rate was 0.5 per cent, although it was raised to 1 per cent in 2010. It has been at that level ever since.

You could certainly argue that the ?real? (inflation adjusted) interest rate in Canada is already basically zero (the inflation rate in Canada was 1.2 per cent as of August) but that does not mean that it cannot go into negative territory. Unlike others, the Bank of Canada still has scope to cut rates, if and when they need to do so. That?s long before getting into any quantitative easing on this side of the border. And let?s remember that Canadian government finances are stable enough that fiscal stimulus is a possibility too ? rather than a pipe dream in so many other parts of the world.

Is that going to be enough to save Canada if things slow down around the world? Of course not: if things get bad enough elsewhere, we are going to be vulnerable to a recession here too, particularly if we get a deep slide in commodity prices. There may be an argument too, that the Bank of Canada is waiting too long and should have stopped worrying about the consumer credit frenzy and just started cutting rates months ago.

There is no agreement on what the world should do about the impending storm. The IMF and World Bank could not come to an easy solution at their recent meetings, and the markets are torn on what the right moves are too.

But if there any comfort for Canada, it is that whatever happens there are a couple of possible buffers to the possible ? a downturn is still a scenario, not a certainty ? turmoil in the rest of the world. The first will likely come through a slide in the Canadian dollar which will cushion trade a bit. The next will come through whatever the fiscal and monetary policy makers decide.

It?s nice to have options.

Economist Linda Nazareth is the principal of Relentless Economics and senior fellow for economics and population change at the Macdonald Laurier Institute. Visit her at relentlesseconomics.com

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Other Globe and Mail op-eds by Linda Nazareth:

?More Canadians working, but are wallets getting bigger?? ? October 5, 2012

?Smaller households, big implications??- September 27, 2012

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Source: http://www.macdonaldlaurier.ca/mli-senior-fellow-linda-nazareth-in-the-globe-and-mail-canada-lucky-to-have-options-if-economy-slows/

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