Liberals' gloomy budget outlook punctured by rosy StatsCan report

Only 10 days ago, Canada's new federal budget came down like theclap of doom.

Oil would be at a rockbottom $25 a barrel. Growth would barely stutter along. A hundred billion dollars in deficits loomedas far as the eye could see. The government offered no plan and no pledge toget back to balance, ever. We would all be eating cat food.

OK, the budget was silent on cat food. Still, it ladled out gloom like the cook in a Dickensianpoorhouse. "Balanced budgets? You want balanced budgets? Forget it!"

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Of course, all budgets depend on whether you expect the economy to grow. If it doesn't, government revenues crash and red ink splashes everywhere. But if business picks up, even huge deficits can disappear.

To keep politics out of these crucial growth projections, the Finance Department normally polls private sector economists to reach a consensus on what to expect. Like soothsayers in Ancient Rome, these prophets then slaughter some chickens, examine the entrails and emerge in a puff of smoke to announcethe most likely scenario.

In February, they revised their previous forecasts downward,predictinga feeble 1.4 per cent growthfor the year.

Wretched as that was, the government said it was still not gloomy enough. Finance Minister Bill Morneau wasn't going to be swayed by abunch of starry-eyed optimists. Instead, he slashed the forecast to just one per cent and sliced a cool $40 billion per year off the projected gross domestic product. Buy cat food futures!

The economists moaned about the ballooning debt and tut-tutted about the chances of turning things around with costlystimulus spending.

"The growth restraints on Canada look to be structural in nature," scoldedthe Bank of Montreal's economists in a report on the budget. The problem was "not a short-term cyclical phenomena that can be countered with a quick fiscal boost."

Worse, saidBMO, "an overly aggressive fiscal boost could do lasting damage to Canada's finances."

Hold it right there

But that was then. Ten days ago.

Now, behold the new Statistics Canada report. Growth is way up! Across the board! This was not in the script at all. But there it is, in the sparkling prose of StatsCan:"Real gross domestic product rose0.6 per cent in January, a fourth consecutive monthly increase."

Real GDP rises in January

So growth steadily increasing, not declining. And if you get half a per cent in one monthand multiply that by12 months, then hey! That's a whole different picture. So it must be a blip, right?

Wrong. Statistics Canadasays it's broad-based and consistent. "Manufacturing, retail trade, and mining, quarrying, and oil and gas extraction were major contributors to growth in January."

Oil and gas? Clearly, Statistics Canadais not keeping up with the news. Don't they get CBC over there?

Apparently not. "Oil and gas extraction grew (+1.4 per cent) for the fourth consecutive month in January," the new report says, "mainly as a result of an increase in non-conventional oil extraction. The conventional oil and gas extraction industry also increased in January."

In fact, Statistics Canadasays things are turning up throughout the economy. Manufacturing is up sharply. Retail is up. Construction is up.

So what do the gloom merchants say now?

They're less gloomy, that's what.BMO'schief economistDoug Porter who wrote that blast about the budget says 2016 is starting off with "a very big upside surprise and unambiguously." By that, he meansit's not a quirk of statistics. He now expects the first quarter to produce "growth of three or fourper cent at an annual rate."

Even in oil and gas, he predicts good news. "I can see oilsands production growing over the full year. There's so much momentum behind it." And manufacturing has had "a wonderful three months."

Manufacturing output expands again in January

Porter doesn't expect things to stay that wonderful for the whole year, buthe says the bank's new estimate for the economy as a whole in 2016 is growth of 1.8 per cent.

"This is not an April Fool's joke," he adds.

So the budget revised the growth rate down but reality is revising it up.

Lower loonie works its magic

Even the Bank of Canada a frequent source of dismal news over the past year is noticing some fresh signs of cheer. Speaking in Edmonton, deputy governor Lynn Patterson warned this week that the full benefits of a lower dollar will not be clear for a couple of years,but they are already becoming apparent.

Building materials, furniture, machinery and pharmaceuticals are all making gains because of the low loonie, shesaid.

"Tourism is surging. The number of foreigners travelling toCanada jumped 11 per cent in January compared with the same month last year."

Patterson said movie production is also booming up 40 per cent in Vancouver last year over the year before. And for anyone who's not in the commodity business, she added, "more gains are coming" if the dollar stays low.

Does that mean the budget got it all wrong?

Not exactly.If the point was to set expectations at rock bottom, and then to exceed them with ease, it looks more and more as though the budget got it right at least as a political matter. All those pessimistic projections could meanthatthe finance minister will get a chance to say, "See? Dramatic improvement! Our plan is working!"

But, of course, that's just a forecast. Apparently, those can change.