Delta variant threat to the global economy means fiscal prudence may take an election back seat

This week, the world's most influential central banker, U.S. Fed Chair Jerome Powell, called the delta variant a "wild card" for the global economy.

While there are warning signs that the growing impact of this new, more contagious strain may play a role in the upcoming Canadian election, economic observers say that by itself, a slowdown during the campaign may not have the effect it might have had in the past.

As the health of Canadians takes centre stage in the minds of voters, and as parties take turns proposing their own stimulus measures, some say fiscal conservatives may have more trouble rousing voters this time around.

That is not to say economic issues related to the pandemic — such as the cost of housing, a 10-year high for inflation, business shutdowns and the effect of school closings on working parents — won't also become election issues.

Same goals, different methods

A lot of the difference between the federal parties is less in their economic goals — for each, that includes long-term pandemic recovery — than in the details of how they get there, said Michael Smart, a University of Toronto economist and founder of the think-tank Finances of the Nation.

"It's a great time to be a policy nerd," he quipped.

Voters don't always read the policy fine print. And in a global pandemic, it's not only the virus and its variants coming from outside Canada — so too do many of its economic impacts.

A surge in Canadian inflation, caused by the kind of stimulus all the parties are supporting, is hard to separate from the even-higher inflation seen in the U.S., our southern neighbour and biggest trading partner. 

The Bank of Canada always insists it sets rates independently, based on the needs of the Canadian economy. But a sudden jump in rates to quell inflation would inevitably affect the loonie, leading to a potentially devastating effect on Canadian exports.

While Canada's high vaccination rate may be helping the country avoid the worst of a delta-driven fourth wave,  there are already signs the variant's spread in places such as the U.S. and China is affecting markets and supply lines.

Reports from the U.S. blamed a sharp fall in retail sales on the spreading delta variant there. And the International Energy Agency has warned that a global slowdown caused by the contagious variant will lead to a decline in oil demand — a crucial measure for Canadian exporters.

Productions lags

The Wall Street Journal reported this week that "repercussions from the delta variant of COVID-19 are starting to ripple across companies," from higher staff costs, to lower potato chip production and lower profits.

And production and transportation bottlenecks are showing few signs of easing, leading to higher producer prices and thus higher consumer inflation.

"Public health shocks come from abroad. So do economic shocks," said Smart. "Should Canadians hold politicians responsible for how the economy is performing [right now]? Probably not, to be honest. But will they? I don't know."

One COVID-19-related economic issue that commentators say could well have an impact on how people vote is business shutdowns.

While many small businesses have lobbied against some public health measures that they saw as preventing them from earning a living, a number of small business owners are particularly anxious to avoid new shutdowns at all costs, said Shadi McIsaac, CEO of RBC subsidiary Ownr, which helps new companies register and incorporate.

That may be why a growing number of businesses are now welcoming vaccine mandates and vaccination passports.

"Almost every entrepreneur who lost a customer — and that was upwards of 90 per cent — was still worried about further lockdowns and economic uncertainty that was looming ahead for them," said McIsaac.

Rather than worrying about how the federal government will pay for all the bailouts so far, businesses are still focused on the danger of a fourth wave and whether they can survive it, she said.

"What we heard from business owners is that they are going to be listening very closely on each party's policy and perspective, both from a financial standpoint — so what are the funding and grants that are coming forward to support entrepreneurship and small business community; and what's the sentiment [of each] around further lockdowns."

As Smart explained, there are broadly two considerations for the economy during this election — and both involve more stimulus. One is having a response ready in case the economic recovery falters, whether due to a new variant or some other cause; the other is to recharge the economy once the threat from the virus finally passes. 

Sales tax holiday 

Whether the stimulus is in new spending, or as the Conservatives have proposed, a sales tax holiday to drive immediate consumer spending, that stimulus will likely end up circulating in the Canadian economy and will pay for itself in higher future tax revenues, said Smart.

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, agrees that balancing the budget will be a very theoretical consideration in this election.

"I think no matter which party you are, there's no realistic way you're going to get to a zero deficit, probably, in the next three years," said Macdonald. 

Beyond retail closures, Macdonald pointed to what could be an even more politically contentious kind of lockdown: Schools, which will open well before voting day on Sept. 20.

Another round of school closures would not just annoy long-suffering parents, he said, but would have an important economic impact, as workers are forced to stay home to supervise kids, many of whom are unvaccinated.

If that happens, he said, the question is where the blame will land for voters.

"I think really the biggest economic issue right now is how we get through the fourth wave," said Macdonald. "How do we support workers and businesses, just the way we've been doing for a year-and-a-half?"

Follow Don Pittis on Twitter @don_pittis