Neil Reynolds

Debt-heavy Canada shouldn't be smug about its economy

OTTAWA — Special to The Globe and Mail

A housing crisis in Canada could create the same economic conditions that wiped out trillions of dollars of property-based household wealth in the United States. (Moe Doiron/Moe Doiron/The Globe and Mail)

For Greece, in economic terms, it’s now calendar year 1999. For Iceland, it’s 2000, the dawning of the millennium. For Portugal, Latvia and the United States, it’s 2002, a full decade ago. For Ireland, it’s early 2003; for Hungary, late 2003. For Britain and Spain, it’s 2004. For Italy, it’s 2005. For France, it’s 2006. For Germany, with the least “lost time” of the major industrialized countries, it’s late 2009.

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The Economist magazine recently calculated the number of years lost by countries that were hardest hit in the economic crises of 2007-08 – and published the results under the wise-guy headline “The Proust Index” – a remembrance of the economic retreats of the past five years. By this calculation, none of the major industrialized countries has yet made good its losses (though Germany is getting close).

But what calendar year is it in Canada? Why did The Economist forget Canada in this retrospective analysis? Aren’t we the best-performing member of the Group of Seven leading industrialized countries? Didn’t we fully recover before anyone else? Did not Finance Minister Jim Flaherty say so himself?

Well, yes, he did say so – or, at least, appeared to say so. Mr. Flaherty made his back-to-the-future speech, implying full recovery, as early as the Couchiching Conference in August, 2010. “Our nation has weathered the deepest … global downturn since the 1930s in far better shape than other major industrialized countries,” he said then. “Canada has virtually recouped a recession’s worth of economic decline.”

What does it mean to virtually recoup – if not to fully recover? In terms of The Economist’s calendar, in other words, Canada had already recaptured all its lost time (or virtually all of it) and was living once again in the here-and-now.

The Economist dissents. Canadians, it implies (by way of omission), are still poorer than they were when the financial crises hit. One important standard, the magazine said, is per-capita income. Measured by real gross domestic product per person in the G7 countries for the past five years, it said, “only Germany has not gone backward.” Perhaps. But this assertion is dubious at best.

The World Bank reports that, at the end of 2010, Canada’s per-capita GDP (based on the purchasing power of the Canadian dollar) stood at $38,989 (U.S.) – only $5 less than it was at its pre-recession peak in 2008 ($38,994).

Judged by other criteria, however, Germany has performed significantly better than Canada. Germany has an unemployment rate of 5 per cent; Canada, 7.5 per cent. Germany’s budget deficit is 1.2 per cent of GDP; Canada’s, 5 per cent; Germany’s current account, which tracks imports and exports, runs a huge surplus; Canada, a deficit equal to 3 per cent of GDP.

Bank of Montreal, in its year-end review of 2011, compared German and Canadian economic performance based on five criteria: unemployment, inflation, fiscal management, current account and credit rating (where we have a triple-A tie).

BMO gave Germany an outstanding performance score of 89.2, Canada, 81.6. So we’re not the best-performing economy in the G7; we’re the second best. (“No. 2 is okay,” BMO economist Benjamin Reitzes said. “We are in the upper echelon of the G7.”)

In another international comparison, the Conference Board of Canada has tended, in the past couple of years, to mark Canada as a B-grade country (ranking ninth) among the 27 Organization for Economic Co-operation and Development democratic and industrialized countries. This suggests that competition is easier in the G7 than in the OECD countries. In the larger field of competitors, countries such as Australia and Sweden compete for first.

What is certain is that it will take years for some hard-hit countries to fully recover from the financial crises. The International Monetary Fund said Italy, three years hence, will still be poorer (in real-dollar terms) than it was in 2007.

The Economist notes that British households have lost close to $800-billion in the past five years, much of it in property-based wealth; U.S. households have lost $9.2-trillion. “For some [countries]” the magazine said, “the time lost to the crisis will never be recovered.”

For Canada, the best may yet to be – or not. As Bank of Canada Governor Mark Carney keeps telling us, Canadians are deeply in debt and a housing crisis, if such occurs, could wipe out household wealth, too. It is far too early, as Mr. Flaherty knows, to brag.

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