Concerned Flaherty says government would respond with stimulus in another slump

Ottawa would move to backstop the Canadian economy if the European crisis triggers a second global financial shock, Finance Minister Jim Flaherty said Monday.

With economic conditions deteriorating in most parts of the world, and especially in Europe, Flaherty told reporters that the major advantage Canada has over many others is room to act.

“If we needed to take steps in response to a shock from outside Canada . . . we are in a position to do so because we have fiscal room to move,” he told reporters.

“Our situation is imperfect but it’s better. We are in a position to act to protect Canada, but we’re part of the world and we would get buffeted as well as other countries.”

In early 2009, the federal government pumped up spending by about $50 billion over two years through tax cuts, income supports and fast-tracking infrastructure projects, among other measures, to limit the damage of the global recession.

Even so, the country fell into a nine-month recession and lost about 430,000 net jobs before halting the slide.

Flaherty said he will discuss the worsening economic climate with his Group of Seven colleagues in a conference call Tuesday morning, but made it clear he considers the situation grave.

Global markets have fallen sharply in the past few days as news coming out of Europe worsened, with Spain joining Greece on the crisis watch list.

On Monday, Portugal’s finance minister said foreign bailout creditors were providing another batch of the country’s US$96 billion rescue package after concluding the government is abiding by the terms of the loan.

Adding to the woes, U.S. jobs growth has largely stalled with Friday’s number coming in at an anemic 69,000, and the fast-growing emerging economies of China, India and Brazil have also slowed markedly.

The minister said Canada would be sideswiped by a new financial crisis even though the country’s “fundamentals are sound,” as it was in 2008 after the collapse of Lehman Brothers froze credit around the world, touching off a deep recession.

He said Canada has another advantage: “We have a government that can act . . .These continue to be sensitive times. We’re not out of the woods yet.”

Many analysts believe the big advanced economies are more vulnerable now to a financial shock and economic downturn than in 2008 because they have already used up their fiscal room and have limited borrowing capacity.

Canada is almost unique in the G7 with a relatively small national debt — about 35 per cent of gross domestic product — and a shrinking deficit.

As well, the Bank of Canada, which has a policy setting rate of one per cent, is in position to cut interest rates further if the situation warrants. The central bank and Ottawa also have the same tools they used in 2008 and 2009, including clearing mortgage securities off bank’s books, to inject liquidity into the system at their disposal.

The flare up in Europe’s difficulties has removed most speculation that the central bank would begin raising rates later this year, with some investors betting that the next move may indeed be a small cut.

Bank governor Mark Carney’s next decision is scheduled for Tuesday morning at 9 a.m. ET, when he is widely expected to keep rates unchanged.