Europe’s Shaky Economies, Ontario’s Shaky HST Make For Volatile Times
If I had asked you about that $.93 loonie last Thursday afternoon you would’ve taken a double take. For those of you who are growing tired of hearing the news last Thursday the Dow Jones lost almost 1000 points in less than one hour. The Canadian dollar dove down into the $.93 range until settling in the $.95 range and now it is in the $.97 range. There’s nothing like a little bit of economic uncertainty piled into financial markets, which sends traders buggy. The uneven time in European markets last week certainly provided that.
So over the weekend European finance ministers met and they came up with a $1 trillion economic package to sustain members of the European Union who cannot roll over their debts or fund their deficits. Greece was the big problem but there’s also Portugal Spain and Ireland. What seemed like such a good idea by putting together a common currency called the Euro doesn’t seem such a good idea now. By getting rid of their own individual currencies these countries lost the ability to inflate their way out of their debt problems.
The Dow Jones industrial average rose almost 4% on the news and the TSX rose over 2%. In many ways it was like somebody getting a cool glass of water. Last Thursday part of the panic with the specter of some European nations effectively defaulting on their sovereign debt. In developed economies that essentially doesn’t happen and it would have sent the euro down even farther and certainly compromise some central banking systems in the smaller euro zone countries. So now it’s like Independence Day, or at least it seems we can breathe for another day.
It’s pretty clear there’s something very, very wrong with this picture and you can see it on the face of Canadian finance Minister Jim Flaherty almost any time he gets in front of a microphone. In my mind there is the real specter of a double dip recession coming to Canadian shores. I say that because in Europe there economic problems have been exasperated by this trillion-dollar bailout. Purchasing power from these European communities can only be compromised and with tightening European credit markets can only hurt the Canadian economy. Or as I said last week blow some of the froth off our beer.
From a Canadian perspective this is very troubling, but thank goodness we are on this side of the Atlantic. With our high economic growth rates combined with a stronger US economy we should be able to weather that storm. However, as all of you know as readers of this column the Canadian economic recovery is regional in nature. In southwestern Ontario it’s not as good as Western Canada. With the introduction of the harmonized sales tax on July 1 there will be even more money being taken away from Ontario families.
That point was reinforced last week from a very unlikely source, Premier Dalton McGuinty. Mr. McGuinty is under constant criticism for the harmonization of the provincial sales tax because it will be more comprehensive in nature taxing an already weary public. He came out last week and admitted that families will see an increase in taxation, which will affect 17% of their purchases. Items like gasoline home energy and Internet bills, tobacco, domestic flights, haircuts and taxi fares will be taxed at a higher rate.
When it comes to criticizing government tax plans it’s almost an endgame. In many ways some of these things make sense in theory but inevitably it ultimately works out in a tax grab. The federal GST was an example of that when it introduced the GST. The finance department thought they would garner much more GST revenue than the previous national sales tax. That did not happen as part of the economy went underground. I cannot see how the HST will be any different. Needless to say government programs cost money and McGuinty probably felt he had to do something and the HST was the easy way out.
The problem is it is a jobs killer and as our economy starts to recover it’s like throwing a wrench into the economic transmission. If you had a choice, you’d never do it. For McGuinty the timing of this is terrible. However, it is reality and Ontarians will just have to adjust.
So when you look at the economic landscape its surely a mishmash as we move into the summer of 2010. The economic machinations in Europe will certainly keep us busy and so will the HST. Hopefully, we will avoid a double dip recession and come out in the end with higher economic growth. We’ll see. The economic times are volatile. There seemingly are surprises every week.