How the Liberal government will affect five key areas of the Canadian economy
Financialpost.com
Oct. 20, 2015
By John Shmuel
Canada is set to head in a new economic direction with the election of Justin Trudeau and his Liberal party to a majority government. Trudeau will have four years to implement his electoral platform, which includes billions of dollars in new infrastructure spending and tax cuts aimed at the middle class. Here is how economists expect the new government will affect five key areas.
The loonie
Following the victory, the Canadian dollar rose 0.2 per cent after shedding 0.8 per cent Monday in the lead-up to election night.
In the coming months, however, the loonie could see some weakness as the currency is hit with an “uncertainty premium,” notes David Tulk, head of global macro strategy at TD Securities. “As observed with prior changes in government, we anticipate the outcome to be modestly USDCAD positive.”
The loonie could also see longer-term weakness, as Trudeau has pledged to run a deficit for the next three years in order to spur economic growth.
“Longer term, more government debt will drag on the Canadian dollar and will make interest payments an increasingly large portion of the government budget,” said Darren Sissons, managing director and portfolio manager at Portfolio Management Corp. “This will ultimately decrease policy flexibility in future years.”
The economy
Trudeau plans to spend an additional $5 billion annually to upgrade key infrastructure in Canada such as transportation systems. David Madani, Canada economist for Capital Economics, notes the increased spending will be worth an extra 0.2 to 0.3 percentage points a year for gross domestic product.
But Doug Porter, chief economist at BMO Capital Markets, points out that while the spending could boost the economy in the next two years, it will likely pose a drag on growth once it is withdrawn.
“At best, the stimulus would lift GDP growth by a bit more than 0.5% next year, so we would be leaning toward annual growth of closer to 2.5% in 2016 (versus our current call of just over 2%, and just 1.2% this year), assuming the proposed measures are fully implemented in the next budget,” he said in a note.
Charles St-Arnaud, an economist at Nomura Securities in London, said he wanted more information on how the Trudeau government intends to balance the budget in its fourth year.
“It is always easier to spend than to restrain spending, and it needs to be made clear how the deficits resulting from the increased spending will be reversed,” he said.
Government bonds
The spread between Canada and U.S. 10-year bonds widened Tuesday following the election. Economists say the spread could continue to widen since Trudeau will run an annual budget deficit of nearly $10 billion for the next two years.
“Our Fair Value Model suggests that the size of the budget deficit presented in the Liberal platform could result in roughly a 10 to 15 basis points increase in 10-year yields, everything else being equal,” said economists at National Bank Financial Markets in a note to clients Tuesday.
But economists do not expect any sizable moves in bond yields longer term, given that deficits will represent 0.5 per cent of GDP at most and that the proposed debt will not be enough to crowd out other borrowers from the market.
“In terms of implications, fixed income markets are likely to see more debt supply but in manageable amounts,” said Jimmy Jean, senior economist at Desjardins Securities.
Credit rating
Credit-rating agencies certainly take note of growing government debt loads, but economists say Canada’s AAA credit rating is not at risk at the moment.
“Nothing at this time remotely suggests rating agencies will view Canada’s creditworthiness differently on this outcome,” Jean said.
Last week, Moody’s said the results of the election would unlikely have any effect on Canada’s credit rating. Others also expect more of the same.
“Canada’s sovereign credit rating, currently AAA, depends on a number of factors, including economic activity, commodity prices and fiscal discipline,” said Emanuella Enenajor, North America economist at Bank of America Merrill Lynch. “We see limited risks of a notable deterioration in fiscal health resulting from the Liberal victory.”
Renewable energy
Trudeau has a particularly ambitious plan for renewable energy projects, with a promise to commit nearly $6 billion in green spending over a four-year period and ramping that up to nearly $20 billion over 10 years. The Liberals will also incorporate climate impact analysis into federal contracting, which could get further money flowing into the green space.
All of that will be welcome news for Canada’s renewable energy companies, especially as the previous government focused investment on the oil and gas sector.