Canada avoided the brutal financial meltdown that plagued the U.S. economy, but there are some red flags that make recovery for this country “by no means a sure thing,” says a leading U.S. economist.
Paul Krugman, a Nobel Prize winner, New York Times columnist and renowned economic pundit, described Canada as “a very calm, very happy story” during the world economic crisis.
Canada escaped relatively unscathed, through a combination of good luck and sound, conservative regulation of banking and consumer debt in which “it is not so easy to use your house as an ATM,” Mr. Krugman told the Canadian Bar Association.
“Canada is an example of the virtues of a relatively traditional approach, a country that did not get caught up in the euphoria of banking innovation,” he said in a speech to hundreds of lawyers.
However, he warned that Canadians’ lavish spending habits, stubbornly high unemployment, and rising housing costs are potential trouble spots that could potentially turn a good news story into a bad one.
“There are a few aspects of Canada that are not scary but a little disturbing,” warned Mr. Krugman, a Princeton University professor.
“Canada is by no means insulated. It’s by no means a sure thing that everything is going to be OK.”
Despite better banking regulation, Canadians tend to “spend and borrow and awful lot like Americans,” Mr. Krugman said in his speech.
“Household debt relative to total income is very high here, not quite as high as the United States but getting close.”
On the plus side, however, Canadian confidence in the financial sector has not been shot, and it is helpful for Canada to have its own floating currency, Mr. Krugman said.
The Bank of Canada, in an economic forecast late last month, acknowledged that the global recovery would slow down as a result of an increased focus on budget-cutting at the household and government levels.
As a result, the central bank trimmed its growth outlook for the Canadian economy to 3.5% this year and 2.9 per cent in 2011, compared with earlier estimates of 3.7% and 3.1% expansion.
The Bank of Canada reported that economic growth petered out in the second quarter of this year, following softer household spending and declining real-estate activity.
In a separate speech on Sunday, Canada’s chief justice also weighed in on the foundation of a solid and sustainable economy, saying that it depends on a strong justice system and commitment to human rights.
“In the short term, a country that violates human rights can appear to be just and experience economic growth,” said Beverley McLachlin.
“But in the long term, instability and the waste of human potential, which are a direct result of a systematic suppression of individual rights and economic freedom, will invariably cause its downfall.”