April 23, 2014


Oliver faces daunting challenges

Canada’s new finance minister’s handling of bubble-like characteristics in the housing market could define his legacy.


Joe Oliver, who took over as Canada’s finance minister last month, will have big shoes to fill. The late Jim Flaherty, his predecessor, who held office during most of the Harper Government’s tenure, was highly regarded in international economic circles for his leadership in the aftermath of the 2008 financial crisis and the ensuing recession.


However despite several attempts, which included tightening lending standards, and encouraging the banks to not excessively cut interest rates, Flaherty was never able to fully get a handle on the bubble-like characteristics plaguing Canada’s housing market. How Oliver, who gave his first presentation as Finance Minister to the Montreal business community this week, tackles that issue, will play a big role in defining his legacy. 


An economy with “mo”

As Oliver admits, he is taking the helm of an economy that has pretty good momentum. “Canada is showing the best economic performance of all G-7 nations,” said the new finance minister. “Since the start of 2006, our country has created more than 1.6 million new jobs.” In fact since the Conservatives took office Canadian families have seen real after tax incomes rise by more than 10 percent and the net worth of Canadian households has risen by more than 45 percent. Canada also boasts the lowest net debt to GDP ratio of all G-7 governments.


One major reason that the Canadian economy did so well is that the country was able to avoid the drastic declines in housing prices that hit the US, the UK, Japan and many other western nations. Why that happened is up for debate. True, the Harper Government deserves some credit. However there were many structural factors at play too.


For example some credit Canada’s solid banking sector, which the World Economic Forum has rated as the world’s best, for not going berserk lending to sub-prime clients, as their US counterparts did. Others credit the country’s rich natural resource base with stimulating continued job creation and foreign investor demand for local assets, including residential real estate.


However others, particularly international observers such as Robert Schiller and Larry Summers, professors at Yale and Harvard respectively, warn that this story may not have fully played itself out yet – that house prices here may well tail off. As Adrienne Warren, an economist with Scotiabank notes, if that happens the impact will be felt “broadly,” in sectors ranging from construction to retail & wholesale trade to finance, professional and technical services .  


Hedging risks

However like his predecessor, Oliver will want to walk a fine line between not giving the impression that Canada’s housing sector is overvalued, while hedging to curve any major excesses in order to limit the downside if it in fact is. How well he manages that balance will play a big role in determining whether the Tories will win the next election.


Previous Canadian prime ministers such as Brian Mulroney and Jean Chretien both lost control of their administrations after the finance ministers who supported them throughout most of their terms left (Mike Wilson and Paul Martin).  


Stephen Harper will thus be taking the lead among those Canadians who are crossing their fingers, hoping that Oliver can pick up the slack where Flaherty left off.





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