Startling Canadian GDP numbers could signal economic turning point: Don Pittis

In economics journalism the normal rule is thatonly gloomynews sells. Canada's latest economic growth figures are so startlingly good that theymake a rareexception.

The first inclination for any self-respecting business journalist is to look for the dark lining withinthe silver cloud. A little more on that later.

But while the Canada economy faces many challenges yet, such strong GDP data are very hard to dismiss. They offer hopethat rather than being a drag on the global economy, a newlyoptimisticCanada may be part of the solution.

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It is hard to exaggerate the significance of these Januarygrowth figures, described as "rip-roaring" by the usually carefulBMO economist Doug Porter. For one thing they wereunexpected, doublewhat economists had predicted.

Staggering growth rate

While 0.6 per cent growthmay not seem like much, we must remember this is a monthly number. If we had 12 months like that, the annual growth rate would be in the range ofa staggering 7 per cent, unheard of in an advanced industrial economy.

The new numbers providevindication for what seemed likePollyanna-likepredictions byBank of Canada governor Stephen Polozwho, duringthe darkest days of the oil crash, promised that the balancing effect of a low Canadian dollar would eventually recharge non-resource industries.

The GDP figures also offervindication for the economic strategy of the previous Conservative government, because it is difficult to see howthe new Liberalgovernment's policy could have taken effect in time to cause these growth statistics.

Perhaps the prospect of new government spending promised in the autumn election campaignenticed some businesses to loosen purse strings.

Whether or not that is true, the newdata bodes well for the currentgovernment's fiscal spending strategy. As mentionedpreviously, government spending only boosts, but cannot replace, weak economic activity. On the other hand, when growth is already happening, even a small burst of spending canhave a jump-start effect, helping to convince capital to get off the sidelines and back into the active economy.

A Canadian glimmer of light

A Financial Times editorialdescribed Canada as a glimmer of lightin a world of "sluggish economies" because of its willingness to use fiscal spending to help boost global growth. But these latestfigures may indicate Canada is providing something even more valuable: leadership in actual growth, not just growth created by artificial stimulus.

And in the current climate, a little growth can lead to even more growth.

If you acceptthe "animal spirits" analysis offered by Poloz at the end of last year, optimism is more than just a good feeling. Ithas real economic consequences, especially after an extendedperiod of gloom.

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Such aburst of real growth could have another advantage for the current government's plans. Itwouldreduce the worry of a debt overhang caused by the Liberals'deficit spending spree. Real economic growth creates new revenue, simultaneouslycutting the debt ratio by expandingthe bottom half of the ratio'sfraction.

While the past three months'growth numbers are strong enough to assure us that the January figuresare not "fluky" according to Porter, we cannot expect such strong economic activity to continue month after month. No one is expecting 7 per cent growth this year.

Hazards ahead

At the same time, as mentioned, there are many real and potentialchallenges ahead for the Canadian economy, many of them raised just this week.

Despite a healthy contribution to January's GDP from the oil and gas industry, the Bank of Canada warned on Wednesday that the energy slowdown is far from over. Deputy governor Lynn Patterson reminded us that while oil output has remained strong, job losses in the sector will continue to have a negative multiplier effect on Canada's energy-producing economies over a period of years.

Also this week, a newwarningabout Canada's growing private debt pile. Well-known international economist Steve KeenplacedCanada in a club of "seven countries most vulnerable to a debt crisis."

Big mortgage? Big worries

As Poloz has reminded us, economic growth often leads to higher interest rates, and Canadians with enormous mortgages may find themselves overextended once rates begin to rise.

And while the economy may be growing, unemployment remains much higher than in the U.S.despite a labour force beingdepleted by the decline of the baby boom bulge.

Threatening as they are, all those perils are far more manageable if the Canadian industrialeconomy is growing, not shrinking.

And while the OECDcut its global growth rate forecastfrom 3.3 to 3 per cent this week, it is very encouraging to imaginethat this time, Canada is no longer part of the problem, but may actually be part of the solution.

And that's no April Fool.

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More analysisby Don Pittis