Canada’s economy is bad. But the U.S. economy is worse

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Things may be bad for the Canadian economy, but if it’s any consolation, they may be worse in the United States.

The bad news is that Canada appears to be heading toward a recession. The good news is that, as typically happens in a rapidly decelerating economy, inflation is slowing. That makes the course clear for the authorities. Unless Tuesday’s inflation report from Statistics Canada reports an upside surprise in the inflation figure, the Bank of Canada will likely cut interest rates again at its meeting the next day. And while the federal government aims to cut its spending in its fall budget, lower interest costs and a comparatively low fiscal deficit will allow it some cushion to absorb the increased spending a recession would cause.

With never-ending tariff drama, the Canadian economy limps along

However, the picture emerging of the U.S. economy is a good deal murkier. Recent job numbers paint a picture of an economy which is slowing down rapidly – or not. Job creation has been steadily declining since last year and is now near zero. In manufacturing the layoffs have begun. Yet despite that the unemployment rate remains near historical lows and real wages remain positive (although there are early signs this may be changing). As a result, opinion among economists is deeply divided, with some saying the U.S. economy is already in recession, and some saying it’s doing just fine.

The picture on the inflation front is at least less ambiguous, if concerning. Inflation is proving a lot more stubborn in the U.S. than in Canada. This week’s reports showed that prices keep rising, and food prices are becoming a real problem for Americans. Moreover, price pressures in the pipeline appear to be building further: Although producer prices fell this month, underlying core inflation actually rose. Producer prices gained 2.8 per cent while consumer prices rose by 3.1 per cent – both well above the Federal Reserve’s 2-per-cent target, and both trending upward. There’s some evidence that producers have so far been absorbing the impact of tariffs in order to retain their customers. If they continue to do that, it could eat into their profits, which would ultimately hurt share prices. But if the economy gains speed and consumers keep buying, they could pass on those price increases, driving inflation even further beyond the targets.

U.S. employment growth revised down by nearly a million jobs

These conflicting signals from the economy thus make the task of the Fed a good deal more complicated than the Bank of Canada’s. If the economy is weakening sharply, cutting interest rates at this week’s Fed meeting will soften the blow. But if inflation is rising, such a step could add fuel to the fire. For investors, that raises the risk of long-term bets: Cheaper credit will fuel spending and investment and help drive up share prices, but the risk of an inflation surge could also wipe out all those gains if interest rates go back up in a matter of months.

Amid such rising uncertainty about the economy’s future course, global investors have begun quietly reallocating away from the U.S. The flood of money being unleashed in the U.S. via government spending, tax cuts and reduced credit costs has been quietly leaving the States to go elsewhere. Amid the policy confusion, that is likely to continue, since other countries offer a clearer investment picture. Thus, after years of underperformance, the Canadian stock market has begun to beat the U.S. one.

Nor is this is trend peculiar to Canada. Despite the new records it is setting, the U.S. stock market is underperforming most of its peers’, mainly because one effect of the increasing availability of money in the U.S. is that Americans are joining the rest of the world and taking their dollars elsewhere. Although the U.S. market is now up by more than 10 per cent this year, China’s has risen by 15 per cent, Brazil’s by nearly 20 per cent and Spain’s an eye-watering 30 per cent.

Therefore, a Fed rate cut may do more to juice the Canadian market than the U.S. one. And even though interest rates in Canada are nearly a full percentage point lower than the U.S.’s, the loonie has held its value this year, suggesting continued investor confidence. So, while the situation in Canada may look dire, the country’s prospects for navigating the coming recession don’t look too bad, comparatively. At 6.4 per cent of GDP, the U.S. fiscal deficit is four times Canada’s in proportionate terms and is on track to get worse.

So, when Canada’s next budget is revealed, rather than squawk at the size of a deficit that is all but certain to increase, given the state of the economy, Canadians would do better to peer at the details to determine where the money is going. If it’s being used just to soften the pain, that wouldn’t be good; but if it’s being used to build for the future, shaping the economy that will emerge from the recession, it should be welcomed.