MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk

Canada's economy will pull out of a mild recession triggered this year by uncertainty around U.S. tariffs later this year with just two more interest-rate cuts and targeted aid for suffering automakers and metal refineries, former top prime ministerial aide Serge Dupont told MNI. 

“The kind of slowdown or technical recession we’re going to see is not one that you need to address by a massive kind of fiscal stimulus,” said Dupont, a former deputy clerk of the Privy Council. The real drag is uncertainty around Donald Trump's tariffs and a reasonable baseline is a trade deal soon lifting most penalties, said Dupont, now at the Bennett Jones law firm.

Any intensification of the trade war would still make it difficult to go beyond two quarter-point cuts this year to the bottom of the Bank's neutral range at 2.25% because more tariffs would create global inflation pressure, he said. Canada's key rate at 2.75% is in the middle of the Bank's estimated 100bp range of neutral and already well below the Fed's benchmark, another barrier to going much further, according to Dupont.

“It would be difficult for the Bank to stimulate the economy in the way they may have done during Covid,” he said. (See: MNI INTERVIEW:BOC Still On Cut Path As GDP Falters- Ex Adviser)

TARGETED ASSISTANCE

The Bank has also led the G7 in this cycle with seven rate cuts from last June to March. Governor Tiff Macklem said after his second meeting on hold he could cut again if the economy worsens but noted elevated core inflation and signs of easing trade tensions.

Officials laid out two scenarios where the economy stalls or shrinks this quarter, and Dupont sees GDP contracting at about a 1% annualized pace in the second and third quarters. That's milder than some past cycles and would encourage the government to stick to its plan to give counter-tariff revenue to industries in need, Dupont said. 

“You could have more targeted assistance,” he said, “and then you just let your automatic stabilizers worry about the rest of the economy.” The stabilizer term refers to programs such as jobless benefits and tax burdens that are tied to weak or strong economic conditions. 

“We don’t think there is a case for a large fiscal stimulus at this time, and you might as well save that fiscal firepower,” he said. “The Bank of Canada would be restrained and the federal government would also be somewhat restrained in addressing a recession.”

FISCAL PATH

The economy should return to normal growth rates of about 2% over each of the next two years, and Prime Minister Mark Carney to keep his promises must use that rebound to slim down spending far more than he's outlined so far, Dupont said. (See: MNI: Carney To Take On Trump, Be Fiscally Cautious - Ministers)

With Carney boosting defense spending to 2% and a NATO summit this month perhaps pushing a target twice as large, Dupont said Canada's fiscal path is becoming unsustainable. 

If military spending goes beyond 2.5% of GDP other areas need to be cut 15% to 20% or by CAD30 billion to CAD45 billion a year, he said. “It won’t be sufficient to just look for efficiencies, to improve productivity in the public service, to implement AI,” Dupont said. Clear spending targets set over multiple years would be the best way to go to enforce the government's goal of declining debt as a percentage of GDP, he said. 

“Too many programs, too many public servants over the past number of years, and it’s time to slim down,” he said. “You’re always kind of vulnerable to disruptions in global bond markets, and you want to have some room in the event that there’s another crisis at some time, when you really have to go out and borrow a lot of money.”