dont pop the champagne just yet

Statistics Canada announced Monday that the Canadian economy grew in the third quarter of this year. That's after three quarters of contraction and - using a common rule of thumb - should mark the end of the recession.

Statistics Canada announced Monday that the Canadian economy grew in the third quarter of this year.

That’s after three quarters of contraction and – using a common rule of thumb – should mark the end of the recession.

But don’t reach for the bubbly just yet.

Real growth was barely positive, at just 0.1 per cent. And thanks to the global banking crisis, this downturn started differently and is likely to end differently too.

We aren’t likely to see good times return as rapidly as after previous recessions. The Bank of Canada is calling for a “more modest recovery” than typical, and recently revised its forecasts downward in light of the strong Canadian dollar.

Overall, the signals remain mixed. On the positive side, Canadian exports rose in the latest quarter for the first time in two years. And the Canadian real estate market is responding relatively well to low interest rates. The latest housing analysis from RBC Economics finds that “seller’s market” conditions, based on sales-to-new-listings, are back in Vancouver, Edmonton, Calgary and more than 10 other Canadian cities.

However, corporate profits and balance sheets are still shaky.

Households remain indebted, despite a sharp rise in the savings rate since last year, and unemployment is high. National unemployment rose to 8.6 per cent in October according to Statistics Canada. There are approximately 400,000 fewer jobs in Canada now than a year ago.

There are also concerns about the lingering aftershocks of the crisis, including so-called “zombie” companies.

These are firms that appear to be alive, but actually have big debts they won’t be able to refinance when they come due. Since five-year loans made as late as 2007 won’t come due until 2012, we may see continued bouts of restructuring and other confidence-sapping corporate survival strategies.

So far, it has been aggressive stimulus spending from governments that has averted a potentially much deeper recession. The federal government is on track for a mega-deficit of $56.2 billion for this year. There will also be some big provincial and territorial deficits. And while our deficit and national debt have been higher in the past as a percentage of the economy, there is cause for concern.

Especially if you live in a territory dependent on federal transfer payments.

This is because the fundamental financial position of the federal and provincial governments may be worse than we think. In addition to the usual short-term financial challenges associated with a recession, there may be a ‘structural’ deficit in the longer-term. That is, government spending programs are set up to be bigger than likely revenue even after the recession ends.

The latest fiscal reports from Ottawa show that spending is up sharply, while personal income tax revenues were down 16 per cent in September compared to a year previously. And the corporate income tax take was down 59 per cent. A decline is to be expected in a recession, and these figures will bounce back. But will they bounce back all the way to 2007 levels?

The first problem is personal taxes, which will be weighed down by persistent unemployment and (although this might elicit cheers in many corners) lower bonuses on Bay Street. Corporate taxes will also be less buoyant, since large portions of the Canadian economy are not likely to be generating bumper profits in the near term.

Unprofitable forestry companies don’t pay taxes, for example, and neither do auto parts manufacturers with large losses from previous years they can carry forward against future profits.

Economic recovery will eventually boost tax revenues, hopefully. Which gets us to the potential long-term structural challenge our governments face.

The problem is that Canadian finance ministers got used to a steady stream of tax revenue driven by investors realizing capital gains during the stock market bubble and on real estate investments. This isn’t likely to come back any time soon, or at least not on the scale we saw before the crisis. And while this might only be a few per cent of the government’s revenue, it could still represent a multi-year – and multi-billion-dollar – hole in national and provincial revenue statements.

This will make it harder to sustain the stimulus and to pay back the debt needed to finance it.

So we’re not in a recession anymore. But we’re not exactly booming either. We may face a prolonged period of going sideways.

So put the champagne back in your cellar. You won’t be needing it any time soon. And if there is cause for a drink before this economic episode comes to a close, it may need to be something stronger.

CORRECTION: Thanks to a reader for pointing out errors in the November 18th column on shale gas. The Colorado School of Mines Potential Gas Committee estimated that the United States has a total available future supply of 2.074 quadrillion cubic feet (not trillion as reported). And current North American gas production is approximately 70 billion cubic feet per day, not per year. Apologies to all.

A question was also raised about the environmental impact of shale gas. Shale gas production involves substantial water usage; well, compressor station and pipeline footprint and emissions; and impacts on aquifers that are under review in some jurisdictions. Shale gas is not the energy source with the biggest environmental impact, and mitigation is possible, but these impacts are not insubstantial.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His latest book, Game On Yukon!, was just launched.

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