LILLEY: Biden’s America enters recession, will Trudeau’s Canada follow?

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The United States is now in a recession.

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Not technically in one, actually in one.

The question now, is Canada far behind.

Supporters of the Joe Biden administration are trying to downplay that the U.S. has now had two successive quarters of economic decline, but they can’t escape the fact that this is the dictionary definition of a recession. After having shrunk by 1.6% in the first quarter, the latest figures show the American economy shrank by 0.9% in the second quarter.

It may be a mild recession, but it is a recession, nonetheless.

In the first quarter of 2022, Canada’s economy grew by 0.8%. We won’t get the second quarter results for a few weeks yet, but some indicators are already showing worrying signs.

Manufacturing has been trending downward, as have exports over the past two quarters. A survey of small business owners by the Canadian Federation of Independent Business finds that business confidence has fallen for the fourth month in a row over concerns about labour shortages and energy costs.

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Royal Bank issued a report in early July predicting a mild recession on the way with Canada’s economy shrinking by 0.5% in each of the next two quarters.

“We think some of Canada’s key trading partners, including the U.S., will be in recession next year. In this environment we think it will be difficult for Canada to avoid a downturn of its own,” the report stated.

Add to this the Bank of Canada hiking interest rates to cool the economy and deal with inflation and you have a recipe for the Canadian economy to head into recession as well. As RBC said, there is a “shrinking runway for a soft landing.”

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So, what will the Trudeau government’s response be if Canada does enter a recession?

Like the Biden administration, you can expect Trudeau and his team to go into overdrive trying to redefine the term and deny a recession is happening. They may be right to point to impressive employment gains that have continued even as the economy has shrunk but that doesn’t mean they get to change the definition.

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The main thing we have to worry about if Canada hits recession is that the Trudeau government will go to their default position and call for more government spending. The increase in government spending is part of why we have the inflation we are dealing with now, we don’t need interest rates rising to cool inflation and government stimulus which will only increase it.

“The best we can hope for is they don’t add fuel to the fire by providing a bunch of tax cuts or expenditure increases along the way,” former Bank of Canada Governor David Dodge said last week in response to skyrocketing inflation numbers.

Tax cuts are doubtful, but the Trudeau government loves to increase government spending in good times and in bad. We all remember Trudeau’s promise in 2015 to run three small deficits of $10 billion a year in response to a mild recession at that time, mostly driven by falling oil prices.

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Of course, Trudeau brought in deficits much bigger than that and continued his stimulus spending even as Canada’s economy came out of recession. Between his first budget in 2016 and the most recent one, Trudeau increased overall spending by roughly 43% not including COVID pandemic spending.

He’s not well versed in economics, we know he doesn’t think about monetary policy, but he does like to spend your money.

The next few months will be delicate ones for the Canadian economy and what happens, the decisions leaders like Trudeau make, could have a big impact on the economic lives of Canadians.

Given the PM’s track record, I’m worried.

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