As Canadians are becoming all too aware, the spectre of a recession, no matter the definition, looms large during an election campaign. Despite such prominence, the recent debate made it abundantly clear that none of the candidates understand why the economy stopped growing in the first half of the year and they have even less of an idea of how to foster future growth.

Liberal leader Justin Trudeau’s opponents may call his Keynesian plans to run $10-billion deficits for the next few years reckless, but how much difference can they really make to an economy that’s now pushing two trillion dollars? It’s an amount that’s neither large enough to stimulate economic growth, nor does it add a worrisomely meaningful addition to the national debt. Prime Minister Stephen Harper’s plan to run a balanced budget carries the trappings of prudence, but it does little to either recognize or rectify the issues behind the country’s stalled economy. The NDP’s Thomas Mulcair, meanwhile, is pledging to raise corporate taxes in a bid to finance increases to program spending. That’s laudable from a distributional standpoint, but without a stronger economy where will the profits come from to provide the tax revenue he’s seeking?

The roots of Canada’s economic problems (and thus any solutions) won’t be found in infrastructure spending, fiscal management or corporate taxes. Instead, the next government will have to contemplate what to do about a huge misallocation of capital that’s arguably unprecedented in the country’s history. Canada has put far too many of its eggs in the wrong basket — gambling on the massive development of a high cost oil resource the rest of the world doesn’t need or want. Not long ago considered by the Harper government to be the engine of economic growth, oil sands production is no longer commercially viable in today’s glutted oil market. Tomorrow’s emissions constrains will make that even more true.

Oil sands operators have already shelved billions in planned investment. Indeed, the oil sector’s rapid implosion in spending is the principle cause of the oil-inspired downturn that’s caused the much-discussed economic contraction we’ve seen so far this year. And that doesn’t even take into consideration the future of the two million barrels a day of oil sands production that currently exists. The billions spent on that output is already gone and the jobs that depend on it may be following shortly.

The oil sands have become an enormous sinkhole for the Canadian economy. Whether the country’s politicians understand how big is debatable. Alternately, they may also just be choosing to stick their heads in the sand and hope everything works out for the best. Either way it doesn’t matter, Canada’s economy will march on regardless. Fortunately, it will have at least one key ally working in its favour — the time-tested financial principle of mean reversion, which posits that deviations from the norm in one direction will inevitably give way to equally powerful movements in the other.

As Canada’s petro-economy unwinds from nearly a decade of oil-created distortions, the pendulum is already swinging the other way. A downsizing of the country’s energy sector is unfolding, which means the oil-linked loonie is also seeing its wings get clipped. That may not be good news for retired snowbirds trekking to Florida and Arizona, but it is a welcome sight for a host of other industries that have struggled in the shadow of the country’s oil boom. From manufacturing to tourism to film production, a weaker Canadian dollar will nurture economic growth in neglected parts of the economy. As activity shifts away from the oil-producing provinces and back towards manufacturing-based economies, Ontario in particular will see a renaissance. After watching its share of Canada’s GDP shrink to a three-decade low not long ago, the province is now poised to start leading the country in growth.

It’s a reversal of fortune that’s already showing up in a broad array of fiscal and economic indicators from housing prices to provincial budget balances. Alberta, which until recently was accustomed to enjoying a string of multi-billion dollar surpluses, is now facing a $6.5 billion deficit. In contrast, Ontario and Quebec, which saw deficits balloon, will see the clouds part and the sun begin to shine on their economies with a warmth that hasn’t been felt in years.

Whether the country’s shifting economic fortunes will end up being the deciding factor in next month’s election remains to be seen. Regardless of the outcome, however, it’s certain that the party forming the next government will end up presiding over a very different Canadian economy than the one the Harper regime spent the last decade trying to mold.

  • petr aardvark

    well as a (print) manufacturer, I am still waiting for the increased growth. We have been hit with 5 prices increases so far this year (18% total) from paper suppliers because so much is done in US $. Which is a drawback of the falling loonie that is not often discussed.

  • Mike Tymo

    I am thinking Mr Rubin has made a point, however I believe Mr Rubin suggested in World getting Smaller book, Saudi / middle east destabilizes with less than $60 dollar Oil. This said, it would seem going into 2% economic Growth in the West 2015/2016 election year. Good ole China with 500 000 000 middle Class ( upped in numbers and disposable income ) Consuming away @ 5% ??? Means things will continue well Canadian Government adapts. I am thinking Mr Harper win the Race.

  • J Christensen

    Petr, this goes right back to the message in this blog entry.

    The only thing preventing Canada from supplying all of the items that are costing you more now has been the misdirected political effort of the federal government. They spent money subsidizing tar sands at the expense of making industries like paper etc productive enough to compete.

    Canada has a surplus of unused labour and all the resources it needs to supply everything Canadian households and businesses need.

    If only the political will and savvy existed to spend our fiat dollar wisely developing competitive/ productive industry in ways that don’t destroy the environment, we could all be the richer for it.

    We don’t have to rob Peter with taxes to pay Paul (the unemployed) via spending, or sacrifice the environment for the economy, in a fiat currency issuing nation. It just takes a political will to move in the direction that makes all our wishes come true.

  • Olivier

    The price of crude has decline over the last year but its not really the case with the price of gasoline, well not at the ratio that crude fell. Instead, many companies have increase their benefit margin at the refinery level.
    I’m really curious to see how long they will continue to do that and what will be the impacts on other industrial sectors that are waiting for low gasoline prices.

  • jaba2872

    Jeff, why do you still believe you are relevant in these discussions? You have lost your ability to be a balanced, measured prognosticator.

    You have been getting it wrong a lot lately and making it up as you go.

    Time for you to fade to black and leave this greater discussion to people who are still in the business of understanding the complexities of the oil sands.

    You’re simplistic answers are embarrassment to the bigger questions and offer no real solutions to a large part of Canada’s energy needs and exports .

  • Instincts

    jaba2872 (aka Sh!T for Brains) If you actually read Jeff’s last book, The Carbon Bubble, you realize how full of crap is your note to him below. His discussions and predictions in that last volume are proving to be even more true now than when he published it last year.

    You might as well go soak in your invested pool of oil, because it won’t be going anywhere any time soon.

  • Newton Shroder3

    Excellent post . For what it’s worth , if your business was looking for a a form , I came across a fillable version here

  • sunny atwal

    Jeff I have read your books amd really like your style of explaining.
    You say things that matter in long run.
    What would you advise a person working in oil industry in terms of career change?
    What professions/fields should be focus on? IT/Finance etc? Living in Ontario and working in oil.
    Any advise would be sincerely appreciated.