Briefing highlights
- What to expect in fiscal update
- Markets at a glance
- OECD sees fragile soft landing
Awaiting the fiscal update
Here are three themes to watch for in Finance Minister Bill Morneau’s fiscal update today: Depreciation, appreciation and constipation.
Mr. Morneau has some wiggle room in his fall economic statement, but, as always, many things are beyond his control and there are questions about how far he’ll go.
“Orchestrating a major turnaround in the economic outlook and market sentiment is likely to be out of reach,” said Laurentian Bank Securities chief economist Sébastien Lavoie.
Finance Minister Bill MorneauJustin Tang/The Canadian Press
That doesn’t mean he’s handcuffed, though.
“As of the 2018 budget, the [fiscal year 2018-19] deficit was projected at $18.1-billion, but there is now room to maneuver,” said Bank of Montreal senior economist Robert Kavcic.
“The [fiscal year 2017-18] shortfall was smaller than expected; the [fiscal year 2018-19] to-date total through August is running $5-billion better than a year ago; and decent growth (2-per-cent real GDP growth in 2019 versus 1.6 per cent in the budget plan) confirms a few billion dollars of upside,” he added.
“This is on top of a $3-billion contingency for the year. So Ottawa has room to roll out something significant without jeopardizing the fiscal plan as it is currently published.”
What to watch for:
DEPRECIATION
— Investopedia
Responding to U.S. tax reforms, Mr. Morneau is expected to allow faster depreciation on capital investment.
“Although it’s only a fiscal update, not a budget, many are hoping Finance Minister Morneau will unveil at least a partial response to the competitive challenges posed by last year’s U.S. tax reforms,” said CIBC World Markets chief economist Avery Shenfeld.
“In particular, markets are watching for a made-in-Canada version of the accelerated depreciation allowances provided to American corporates undertaking capital investments in that country,” he added.
“If Morneau delivers on that hope, some will see it as a new tailwind for a Canadian economy that has not fared well in attracting business capital spending, with the U.S. showing non-residential capital spending up 20 per cent more since 2009 than in Canada. The energy sector’s larger weight in Canada saw [capital spending] soften much more sharply when oil prices weakened in late 2014, and we might be fated for something similar now, even with a dose of tax relief.”
This would be a “double benefit,” Royal Bank of Canada chief economist Craig Wright agreed, by going some way to catch up with the Trump administration, and at the same time promoting investment at home.
“Strong investment activity would offset an expected slowing in consumer spending while providing a much-needed lift for Canada’s long-term growth prospects,” Mr. Wright said.
“The fiscal hit from such a move is difficult to gauge, as it depends on the scale, scope and timing of any such changes,” he added.
“A broad-based move would translate into a fiscal cost of a few billion dollars per year over the coming period. While no doubt a large number, program spending rose by just under $20-billion last year, suggesting some restraint on spending would limit the fiscal hit of the much-needed boost to Canadian competitiveness.”
APPRECIATION
— Oxford Living Dictionaries
As Laurentian’s Mr. Lavoie noted, Mr. Morneau is handcuffed on certain issues, such as the U.S.-China trade tensions that could wash up in Canada, and the fact that the House Democrats could tie up the U.S. Mexico Canada Agreement, the successor to NAFTA.
He can appreciate the impact, though, and possibly even deal with some of it.
“”Given increased global trade tensions, look for some discussion (and hopefully some concrete measures) that seek to reduce interprovincial trade barriers,” said BMO’s Mr. Kavcic.
“Finally, at least some mention of the energy sector will be warranted considering borderline crisis conditions, but we’d be surprised by any new steps to improve the key issue – transportation capacity.”
Mr. Morneau can also appreciate what’s looking better these days.
“The economic assumptions underlying the fiscal plan are likely to be a little more upbeat relative to those in Budget 2018,” said RBC’s Mr. Wright.
“The economic data has surprised slightly to the upside, suggesting some remaining economic momentum,” he added.
“A key downside risk to the outlook – the tearing-up of NAFTA – has been averted.”
Put it all together, Mr. Wright said, and what you’ve got is a “slight upward revision” to the outlook for economic growth compared to budget assumptions, with gross domestic product now expected to expand by about 2 per cent in 2018 and 2019.
Weighing on that, of course, are rising interest rates, all of which leave “the net economic impact on the fiscal outlook at neutral.”
CONSTIPATION
— Dictionary.com
This one’s a biggie for Mr. Wright: “Although the federal government’s pending release of the fall economic statement (FES) may hold some surprises, one near certainty is that Ottawa will continue to run deficits as far as the eye can see.
Indeed, “despite a buoyant economy, any step the government takes away from the current fiscal path is likely to be in the direction of larger deficits.
The federal government, Mr. Wright noted, “abandoned any pretense” of a balanced budget, deciding instead to target the ratio of debt to GDP.
RBC’s chief economist considers this a “very weak fiscal anchor” that promotes a policy that, in turn, exaggerates the economic cycle.
“This approach has enabled rapid growth in program spending, which averaged 6.5 per cent annually over the last three years from an average of 1.5 per cent in the preceding three years,” Mr. Wright said.
“With Canada’s economy currently bumping up against capacity constraints, ongoing fiscal stimulus is putting added strain on capacity, as well as upward pressure on interest rates. At this point in the economic cycle, fiscal policy would be better aimed at running budget surpluses and reducing debt to better position the Canadian economy for an eventual slowing.”
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Michael Babad