Financial Insights That Matter
The Liberal Party of Canada in a stunning turnaround has won the federal election and though the final results have yet to come it looks like he will be leading a minority government.
So what does this mean for Canada’s economy?
Even without a majority, Liberal leader Mark Carney should be able to implement his fiscal plans with support from the NDP or Bloc Québécois, said Stephen Brown of Capital Economics.
“If anything, the need to grant concessions to those parties means fiscal policy could end up even looser than the Liberals have signalled,” said Brown.
And that could mean a tighter Bank of Canada.
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David Rosenberg, of Rosenberg Research & Associates Inc., said the fact that the Liberals will have to team up with a “partner that is even more ambitious on the fiscal front” could be positive for the Canadian dollar because it will mean less pressure on the Bank of Canada to ease monetary policy than if the Conservatives had won.
Capital’s Brown said looser fiscal policy could mean that market expectations of the central bank’s rate settling at 2.25 per cent might be too low.
“That presents a modest risk to our view that the Bank of Canada will cut another three times this year, which would probably prevent the loonie and bond yields from falling by as much as we anticipate,” he wrote.
One thing that looks certain is more red ink.
“Deeper-than-anticipated deficits could be the cost of coalition-building, though the government may wish to hold the line as trailing parties have little interest in heading back to the polls anytime soon,” said Rebekah Young of Scotiabank Economics.
CIBC Capital Markets chief economist Avery Shenfeld said the Liberals may need to put more funds towards other parties’ priorities such as health care for the NDP and support for the metals sector for the Bloc.
Under the Liberals’ plan the deficit is projected to rise to 2 per cent of GDP or about $62 billion, higher than the Parliamentary Budget Officer’s projection of 1.5 per cent of GDP.
Avery said the forecast was reasonable if trade negotiations go well and the economy does not fall into recession this year.
“But there is more downside risk to the economic outlook than upside risk, and the reverse will therefore be true for the budget deficit,” he wrote in a note. “Odds of the deficit topping 2 per cent of GDP are likely more material than an undershoot.”
That would still leave Canadian federal deficits at about a third of where the United States is headed, he said.
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