Release your economic 'animal spirits' in 2016: Don Pittis

Bank of Canada governor Stephen Poloz wants you to let out your inner animal.

"We have strengthened our financial architecture to protect against future crises," Poloz told us in a recent speech, "sustaining growth and avoiding stagnation until such time as Keynes's animal spirits, which have been crushed over the past seven years, revive."

Animal spirits? You mean dancing with a lampshade hat on New Year's Eve? Well, something like that.

Poloz isn't the only one who thinks this is what Canada needs. And following recent news about the state of Canadian growth, especially the crumbling of the Canadian resource economy, it is worthwhileimagininga formula for success.

• Price of oil loses3%, dragging looniebelow 72 cents US
• Canada's GDP unchanged in October
• Manitoba's economy to thrive in 2016: Conference Board

Keynes's concept of animal spirits isin many ways completely contrary to some of the mosthard-nosedconcepts of modern economics.

Grouped around what's called the efficient-markets hypothesis, this conventional analysis puts its faith in what you might call the clockwork economy.

In the mood for risk

In this conventional view, the wisdom of thefree marketsees every opportunity and exploits it. There is never any free money sitting around,because someone immediately picks it up.

But, instructed by the irrational gloom of the Great Depression, Keynes saw other forces at work. He saw plenty of labourand plenty of need. But the clockwork economy failed to take advantage of those opportunities.

The Keynesian analysisactually prefigured the recent enthusiasm for behavioural economics, which studies how people's feelingsor a national mood setthe pace for a country's economic success.

According to Keynes,rational analysis could reveal only part of howthe real economy works.He suggested another way of explaining changes ineconomic activity.

"Mostof our decisions to do something positive can only be taken as the result of animal spirits a spontaneous urge to action rather than inaction," he wrote.

Breaking out of the gloom

Certainly the Canadian economy has been weighed down by gloom. Our last bout of optimism focused on oil and gas, especiallyin Alberta, Saskatchewanand Newfoundland and Labrador. That has not gone well lately.

Other parts of the country have remained mired in the aftermath of the 2008 meltdown. Investorswere bent onpreservingtheir nest eggs, buying property, bonds and blue-chip stocks. NowPoloz says the time has cometo bring out the animal andreboot Canada's maker economy.

Manufacturing has been declining for 15 years. Despite a plunging loonie, recovery still seems far away, saysPaul Bootheof theIveySchool of Business atOntario's Western University.

"Manufacturing sales are recovering, so we are improving, but it's important to note thatwe're still not where we were in the year 2000," he said in a recent ConferenceBoard of Canada briefing.In fact, since the turn of the millennium, manufacturing has shrunk not only relative to the overall economy, but also in real terms.

In the animal spirits analysis, that may be a good thing, because gloom has meant opportunities have been missed. They are waiting to be found.

Meanwhile, the U.S. central bank has begun to raise interest rates, making speculating on safe assetsless appealing. In Canada thefederal government has taken one small step toward cooling the housing market that soaks up so much Canadian wealth.

It's a bit of a balancing act, but so long ashousing doesn't crash, but stabilizes at a what Poloz calls "asustainable level," it will redirect investment out of housing and into a little more risk-taking.

"What happens instead is you have a rising share of non-resource exports in the economy and that becomes your primary headline source of new growth, new firm creation and investment," said Poloz. He says there are signs this is already happening.

Plenty of opportunities

With the Canadian dollar at new lows for the decade, there are plenty of manufacturing and export opportunities, large and small, saysPeter Hall, chief economist at Export Development Canada.

Hall, who is something of a cheerleader for Canadian manufacturing and growth, has been watching a transformation of Canadian exports away from our traditionalmarkets.

"Back in 2000 we exported about fiveper cent of what we do to emerging markets," said Hall in a long telephone chat earlier this year. "That's now 12 per cent. That's a pretty monumental shift in a short period oftime."

According to Hall, you don't have to be huge or high-techto get into that market. Canadian prepared foods, known around theworldfor their high quality, represent just one area with enormous growth potential.

Tomake a sense of animal spirits work, ithas to spread to individuals willing to put some of their savings into new ideas. It mustspread to banks willing to provide capital for riskier ventures.

"We're talking about supporting big companies, medium companies and small companies. They're all involved in this,"says Hall. "That's what's exciting about it."

It's time to get excited.

In 2016, make something and sell it. Let out your inner animal.

Follow Don on Twitter@don_pittis

More analysisby Don Pittis