Flaherty doesn’t rule out stimulus, but says Canadian economic growth on track

TORONTO – Jim Flaherty isn’t ruling out stimulus spending to protect jobs and the economy in the event of another global economic crisis, but the federal finance minister stress that growth in Canada — while “modest” — is on track.

The Canadian economy grew at an annual rate of 1.8 per cent in the second quarter, Statistics Canada said Friday, while the government’s Fiscal Monitor showed its budget is closer to balance than it was a year ago.

Those figures had Flaherty singing the cautious praises of Canada’s GDP growth — the best among the G7 countries — while warning that global instability continues to loom.

And if the world is plunged into another crisis like the 2008 recession, growing the deficit through stimulus measures is an option, Flaherty said.

“What has been done before can be done again,” he said.

“If we ran into a serious world economic crisis arising out of the European situation, or something else … then of course we’d be responsive if we had to be, to protect the Canadian economy and protect Canadian jobs as we have done in the past.”

In early 2009, the federal government pumped up spending by about $50 billion over two years through tax cuts, income supports and fast-tracking infrastructure projects, among other measures, to limit the damage of the global recession.

Even so, the country fell into a nine-month recession and lost about 430,000 net jobs before halting the slide.

In its monthly Fiscal Monitor, released Friday, the Finance Department recorded a shrinking deficit for the first three months of the 2012-2013 fiscal year, but cautioned that the fiscal outlook is at risk of deteriorating.

The department said the deficit for the first three months of the 2012-13 fiscal year was $2 billion — less than half the $4.2-billion recorded for the same period last year. The department said that’s consistent with its plan to reduce the 2012-2013 deficit to $21.1 billion.

The 1.8 per cent second quarter GDP figure was slightly higher than economists’ expectations and nearly in line with the Bank of Canada’s projection of 1.9 per cent. But it was the third quarter in a row for sluggish economic performance below two per cent.

“Relatively speaking, Canada is in good shape. It’s just that there are risks in that big world out there and we’re part of the world,” Flaherty said.

Douglas Porter, deputy chief economist at BMO Capital Markets, called the GDP figure “nothing to write home about.”

“The economy is essentially growing right in line with the U.S. now and is still rising below potential,” Porter wrote in a note to clients.

Statistics Canada said business investment was mainly responsible for keeping the economy afloat from April to June — as if on cue in the wake of scoldings from the Bank of Canada and federal government, which recently chided companies for sitting on an estimated $500 billion in spare cash.

The agency said investment in plant and equipment grew at its fastest pace since this time last year, up 2.3 per cent from the previous quarter. Purchases of transportation equipment and industrial machinery were particularly strong.

“Particularly encouraging was the more than seven per cent investment growth in productivity, improving machinery and equipment. This is something I’d like to see more of going forward,” Flaherty said.

“As I’ve mentioned on numerous occasions, private-sector business investment is key to laying the foundation for a sustained, long-term expansion of Canada’s economy and job growth.”

Non-farm inventories surged during between April and June. Businesses increased their inventories by $15.2 billion in the second quarter — $7 billion more than in the first three months of the year.

But demand for exports slowed and imports rose substantially, dragging down overall growth.

In June, gross domestic product grew 0.2 per cent from May, propelled by output in the mining and oil and gas sector. Output declined in the wholesale and retail trade sectors, as well as manufacturing.

The Fiscal Monitor noted that, from April to June, federal revenues rose 4.7 per cent because of higher income tax payments and a hike in the Employment Insurance rate, while expenses rose at a more modest pace.

For the month of June alone, the deficit was $1.1 billion, compared with $2.3 billion for June 2011.

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