GDP: Austerity Bites

Canada’s economy grew by half a percent in the first quarter of 2012, staying on pace for unimpressive annual growth of two percent.

The good news is that business investment was strong, at least on a seasonally-adjusted basis. (As usually happens in the first quarter, the actual dollar value of business investment decreased.)

Unfortunately, the other major components of GDP weakened. Government spending on goods and services fell by 0.4%, its largest quarterly decline since 1997. Fiscal austerity is starting to take a bite out of Canadian economic growth.

Consumer spending grew by an anaemic 0.2%, its slowest quarterly growth since 2009. Weak consumer spending reflects weak labour income, partly a consequence of austerity and other policies to suppress wages.

Exports grew by 0.6%, down from 1.7% in the preceding quarter and 3.7% in the quarter before that. In contrast to the 1990s, Canada cannot rely on external demand to offset domestic austerity.

Today’s GDP report should prompt governments to reevaluate the pace of budget cuts and the Bank of Canada to keep interest rates low.

This spreadsheet displays the above GDP components going back to 1997.


  • Weak consumer spending is an entirely predictable result of austerity–even mild austerity. But now the government is in a bind: on one hand, it wants to bring down the budget deficit, which is a result of Canada’s large trade deficit; but on the other hand, it wants a shrinking private savings rate, which doesn’t usually happen in the presence of a budget deficit. The solution? Either an attack on the trade deficit, which means mitigating the effects of the oil boom, or the encouragement of an asset bubble that draws in consumer spending and private investment. Because the former seems highly unlikely in the current political environment, the latter is looking increasingly probable.

  • Mine to Randy Hoback:

    Mr. Hoback,

    I saw the video, now making the rounds, of your performance interviewing Erin Weir.
    Hilarious! You fit John Harris’ description of some of today’s politicians stunningly:

    Yet this is where politics and power have ended up: in the hands of too many people – men, by and large – who style themselves as expert players of the game, but know far too little.
            The Guardian, June 4th

    Judy Kennedy
    Granville Ferry, NS

    Copied to:
    Rt. Hon. Stephen Harper
    Peggy Nash
    Erin Weir

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