Table of Contents
In late 2008, billionaire investor Warren Buffet called the financial crisis a ‘financial Pearl Harbor’ (Clark 2008) and former US Federal Reserve Chairman Alan Greenspan described it as a ‘once-in-a-century event’ (Stein 2008). Like the problem itself, however, Canada’s experience of, and its government’s response to, the financial meltdown have been more ambiguous. Canada entered the economic turbulence from a position of relative strength and suffered far less than would be expected of a country whose economy was so dependent on its southern neighbour. At the time of writing, Canada’s financial system has been less affected by the global financial crisis than those of other industrialised countries such as the United States and the United Kingdom, and its banks have not required an injection of government capital. In fact, in October 2008, the World Economic Forum ranked Canada first in the world for the soundness of its banking system and, in March 2009, Canada’s banks were expected to report another profitable quarter, defying global trends (Hopkins 2009).
On the other hand, no one major country in the world is as dependent on another nation for its economic wellbeing as Canada is on the United States. Canada ships almost four-fifths of its exports to the United States (Statistics Canada 2008), and all of Canada’s recent surpluses in its current account are attributable to the United States’ buying power (Fry 2009:35–6). In addition, investors in the United States account for about 58 per cent of the foreign direct investment stock in Canada and these investments have provided more than one million jobs for Canadian workers. Canada’s tourism and hospitality sectors have also been seriously dependent on the United States since Americans account for about 80 per cent of all foreign visitors to Canada (Fry 2009:35–6).
As a result, the effects of the global financial crisis on the Canadian economy did not begin to be felt until late in 2008 and early 2009, when the reduction in American consumption began to translate into difficulties for Canada’s export, service, auto and primary sectors. Rising unemployment, reduction in foreign investment and the falling value of the local currency were particularly significant manifestations of the financial crisis in Canada. Indeed, the full extent of its impact was being fully understood—and suffered—by ordinary Canadians only as of early 2009.
The three people responsible for leading Canada through this crisis and therefore subject to analysis in this study are Prime Minister Stephen Harper, Minister for Finance Jim Flaherty, and the Governor of the Bank of Canada Mark Carney. Harper and Flaherty are members of the Conservative Party, which has been a minority government since 2006. Carney’s post is not political, since the Bank of Canada’s Board of Directors appoints the governor. As this study will show, however, it was precisely the apolitical nature of his office that conferred significant importance and legitimacy on his public pronouncements—and meant Carney was a significant figure in shaping public opinion about the events.
Because the real extent of the effects of the crisis on the Canadian economy was not revealed until the end of 2008, for most of that year, the Conservative Government was able to exploit its position of incumbency and Harper’s reputation as a respected economist—specifically, that Harper, who held an MA in economics, was Canada’s first Prime Minister to be a professional economist. Emboldened by an economy that seemed largely unaffected by the crisis that was engulfing the rest of the world, and by a weak and divided opposition, the usually cautious Harper called an early election in October 2008. He asked Canadians for a mandate to lead the country through the financial storm (though it was widely accepted that he was also hoping to secure a parliamentary majority the Conservatives had hitherto lacked). Although the Harper Government was comfortably returned (albeit without a majority), the September election campaign, coupled with the simultaneous rapid fall on Wall Street, facilitated public discussion and awareness of the severity of the meltdown and revealed considerable flaws in the Conservatives’ public framing of the crisis. After the election, the government’s optimistic outlook proved to be increasingly fragile, as the reverberations of the global crisis steadily permeated the Canadian economy. The government was forced to rescind on its assurances that Canada’s economy was so sound that it would even produce a surplus in the subsequent fiscal year. In fact, the government had to concede that Canada’s economy was officially in recession and that the country would be forced to produce a deficit, the projected amount of which inflated from $30 billion in January 2009 to $50 billion at the time of writing in June (Jones 2009).
The continuous policy backtracking since December 2008 saw the government’s credibility erode significantly. Its apparent reluctance to admit the severity of the crisis created a perception that the Conservative Government lacked empathy for ordinary Canadians hit by the crisis. Despite these setbacks, the government remained in a position of relative strength in June 2009. It was enabled by politically weak opposition parties, who had been riddled with their own leadership difficulties and who, despite the opportunity the crisis presented, were unable to put aside their divisions to effectively challenge the government on the basis of economic competency. A telling example was the parliamentary crisis in December 2008 when the Harper Government found itself facing the prospect of defeat in the House of Commons on a motion of confidence brought by the three opposition parties. In addition, the three parties signed a formal coalition agreement providing for a Liberal–NDP coalition government (supported by Bloc Quebecois) to assume power if the government was defeated. The government was forced to prorogue Parliament for two months, but the coalition fell apart almost as soon as Parliament returned, unable to agree on an appropriate response to the budget, thus ending the parliamentary crisis.
Box 4.1 Canada’s financial crisis trajectory, April 2008 – April 2009
24 April 2008: Finance Minister, Jim Flaherty, announces that the government will tighten securities regulation to force more disclosure by financial institutions about their investments.
21 August: According to Statistics Canada, 15 of 22 industry groups reported higher profits, led by oil and gas extraction and manufacturing. Canadian corporations earned $69.4 billion in operating profits in the second quarter—up 2.5 per cent from the first quarter.
22 August: Flaherty uses his department’s monthly fiscal update to announce that the Federal Government has revised its working estimate for growth to 1.1 per cent from the 1.7 per cent forecast in the February budget.
28 August: The Harris/Decima Investors Group Survey indicates that pessimism about the economy in the coming year fell 6 per cent since the previous survey in May, to 32 per cent.
6 September: Findings show Canadian employers hired 161,000 people in August, maintaining the unemployment rate at 6.1 per cent.
7 September: Prime Minister Stephen Harper, calls an early election for 14 October.
11 September: Labour productivity falls for the third consecutive quarter, highlighting a marked deterioration in Canada’s competitiveness and a signal that growth is slowing.
15 September: As the Toronto Stock Exchange (TSX) closes down 515.55 points, Harper warns against economic pessimism about the unfolding US financial crisis, saying that if an economic crash was coming, it would have happened already.
19 September: Harper says Canadian financial institutions have not been hit hard by the US financial crisis; therefore, there is no need for a bailout of Canada’s chartered banks.
23 September: Statistics Canada says Canada’s consumer price index is at its highest point since March 2003 due to thriving food and gas inflation.
24 September: The Bank of Canada pledges $4 billion to unfreeze credit markets; Statistics Canada says inflation jumped to 3.5 per cent in August—the highest rate since early 2003.
25 September: The Bank of Canada pledges a further $6 billion in emergency short-term lending to help lenders deal with tighter credit markets.
29 September: The TSX closes 841 points down—the biggest one-day point drop ever—as the US Congress votes down the bailout package; Scotiabank Commodity Index drops 8.9 per cent.
30 September: The Bank of Canada injects an additional $4 billion into short-term money markets as a means to increase the flow of credit.
1 October: Volvo closes its Ontario plant, with a loss of 500 jobs; Statistics Canada says Canada’s economy boomed in July, growing 0.7 per cent on the strength of surging energy output—the fastest pace of growth since March 2004.
8 October: Central banks announce coordinated rate reductions and the Bank of Canada lowers its interest rate by 0.5 of a percentage point to 2.5 per cent.
10 October: The Canadian dollar experiences its biggest one-day drop since 1971.
14 October: Harper’s government is re-elected.
19 October: Flaherty predicts a ‘modest’ surplus for the current fiscal year.
21 October: The Bank of Canada lowers its interest rate by 0.25 of a percentage point to 2.25 per cent.
24 October: The government guarantees bank loans.
30 October: Harper announces a new cabinet, enlarging it to 38 members and increasing Ontario’s representation. Three of the most heavyweight portfolios (finance, industry and transport) remain unchanged; the opposition criticises the retention of Flaherty.
31 October: The Harper Government announces it will limit the growth of equalisation payments to poorer provinces in light of the global financial crisis.
1 November: Bank of Montreal and Bank of Nova Scotia say Canada is entering a recession; the government denies it.
10 November: General Motors’ shares drop to a 60-year low. The auto industry is Canada’s largest industrial sector by employment, accounting for 12 per cent of manufacturing gross domestic product (GDP) and employing more than 500,000 Canadians.
12 November: Canadian stocks fall below 9000 points, as investors ignore a new Canadian Government pledge to better stimulate lending by the banks.
20 November: Harper makes his reply to the ‘Speech from the Throne’, emphasising that he will act quickly to protect Canadians in a time of global instability.
24 November: Flaherty concedes that Canada is in recession; the Canadian dollar is up 3.5 per cent, buoyed by the bailout of Citigroup.
30 November: Flaherty announces a five-year economic action plan to stimulate the economy.
9 December: The Bank of Canada lowers its interest rate by 0.75 of a percentage point to 1.5 per cent.
20 January 2009: The Bank of Canada lowers its interest rate by 0.5 of a percentage point to 1 per cent.
24 February: Parliament passes the Economic Action Plan, which seeks to provide almost $64 billion over two years to support the Canadian economy, including money for infrastructure, tax cuts and changes to the employment insurance scheme. The government predicts a deficit of $34 billion in the next financial year, and $30 billion in the year after that.
2 March: The Canadian dollar hits a three-month low against the US dollar, exacerbated by renewed risk aversion and the declining price of crude oil. A Statistics Canada report reveals that Canada’s GDP shrank by 3.4 per cent in the fourth quarter—one of the lightest declines among the major global economies. On an annual basis, GDP fell by 0.7 per cent—the first decline in the annual rate since 1991.
3 March: The Bank of Canada lowers its rate by 0.5 per cent to 0.5 per cent.
11 March: The International Monetary Fund (IMF) announces that Canada is ‘better placed than most’ to weather the global recession due to a strong fiscal package announced in January and a healthy financial sector.
6 April: A study by the Canadian Centre for Policy Alternatives finds that rapid contractions of the economy and the job market eclipsed the Harper Government’s stimulus package before any money was even dispensed. The study reports that the package laid out in the 27 January budget was too small, too late and ‘out of proportion to the threat that Canadians are currently facing’.
9 April: The Statistics Canada Labour Force Survey shows employment declined by 61,000 places in March 2009, pushing the unemployment rate up 0.3 of a percentage point to 8 per cent—the highest rate in seven years.