The World Bank recently revised its 2016 global growth forecast downward to 2.4 per cent from the 2.9 per cent it had projected back in January, a sizeable revision. The International Monetary Fund, meanwhile, confirmed global growth prospects "remained lackluster."
In Canada, the economic prospects for the next few years are rather bleak, with the Bank of Canada projecting 1.3 per cent growth in 2016 and 2.2 per cent in 2017, while the IMF predicts 1.4 per cent in 2016 and 2.1 per cent in 2017. Other institutions are not as optimistic.
Overall business-lending conditions in Canada are tightening as banks become increasingly pessimistic, and as we were reminded recently, labour market participation in Canada is now near a 20-year low. And with world economic conditions deteriorating, don't expect bursts of growth anytime soon. In fact, this may be the new reality: sunny ways are making room for darker days.
Back in October, I heralded the election of the Trudeau Liberals as a victory for Keynesian economics, a sentiment that was echoed the next day by Nobel laureate and famed economist Paul Krugman.
- World watching as Canada casts aside austerity and gambles on a fiscal surge
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Similarly, I applauded the federal government's first budget for turning to fiscal policy to get the economy moving again: monetary policy has simply run out of steam. More monetary stimulus would have no effect on the economy, and it was time for some serious fiscal stimulus.
I welcomed this as a responsible policy, which received considerable support from business groups and the private sector. The consensus regarding the fiscal stimulus was never about whether the government should spend, but rather, how much. As an unrepentant Keynesian, I have been advocating for years the use of responsible fiscal policy as a way to promote economic growth: this was the right policy.
I still think Trudeau's fiscal response is an appropriate one … for now. However, it has its limitations for two reasons: first, the government's response was not sufficient; and second, Canada is not an island, and fiscal stimulus in Canada can only go so far when the rest of the world is still mired in austerity.
Hit hard, hit big
Regarding the first reason, I am a believer in the 'hit hard, hit big' approach to fiscal policy, especially when the circumstances call for it. The impact of small incremental deficits does not compare to that of a large one right off the bat: there was plenty of room for more spending, and the government should not have shied away. We needed bold policies.
As such, Trudeau's response will prove inadequate in the longer term. This spells potential danger: in the next year, as the impact of a small deficit proves inefficient, the austerians in the government will become bolder and proclaim loudly that deficits don't work. At that point, we risk falling back into austerity policies.
Second, and perhaps more importantly, while expansionary fiscal policy at home is one thing to consider, if we are the only country spending, it will eventually run out of steam as we hit the global austerity brick wall. After all, we can only do so much on our own. Eventually, the global economic reality will drag us down: we cannot rely exclusively on the U.S. economy.
What's the solution?
What is needed now is a truly global policy of fiscal stimulus. In other words, we need all major economies to start spending. It worked before. In the aftermath of the financial crisis, in 2009, a great number of countries, including Canada, adopted expansionary fiscal policies. That largely contributed to stopping the decline in worldwide GDP. The problem, however, is that a mere year later, at the G20 meetings in Toronto, countries agreed to revert to their old austerity policies. The result of this is evident: world growth has stagnated ever since.
Sustained global fiscal effort
While economic growth in the U.S. may be defying expectations, it is not sufficient to bolster world economic growth on its own: we need a sustained global fiscal effort. It is difficult to say right now for how long, but certainly more than a single year. We may need stimulus for up to a decade – that is certainly not out of the question. Countries will incur deficits, and probably large ones, but we can deal with the deficits later. What must now be the number 1 priority of all governments is economic growth, job creation and shared prosperity.
In other words, we need a global anti-austerity growth strategy, not unlike the 1948 Marshall Plan, which ushered in an almost unprecedented three-decade-long period of growth. Only by moving forward in step can world leaders undo the harm austerity caused.
Canada is uniquely poised to lead this global fiscal revival. Trudeau should focus his attention on not only signing trade treaties, but in convincing other heads of state to follow his economic policies.
Louis-Philippe Rochon is a professor of economics at Laurentian University and a founding co-editor of the Review of Keynesian Economics. Follow him on Twitter: @Lprochon.