Growth boom is Trudeau’s boon, at least for now
Canada’s economy is booming, and that’s good news for Justin Trudeau. The question is whether it can last until the next election.
Growth in May beat all forecasts, a 4.6 per cent expansion on a yearly basis that was the fastest in 17 years. Canada is forecast to lead the Group of Seven in growth this year, data compiled by Bloomberg show.
Fortunately for the prime minister, Canadians are starting to feel it. Recent polls show his popularity stable or improving. His marks on the economy are particularly strong — half of those who voted for the rival Conservative party, whose core political message is economic competency, give Trudeau a passing grade on the subject. The Bloomberg Nanos Canadian Confidence Index has reached an 11-month high.
Yet one risk is the economy may be peaking too fast, politically. That might explain why Trudeau and Finance Minister Bill Morneau continue to say they will stick to their spending plan rather than tighten fiscal policy amid the expansion.
The Bank of Canada raised interest rates on July 12, and is expected to hike at least once more this year. Some officials within the Trudeau government are nervous the tightening began too soon, as Canadians carry ample debt. A Morneau spokesman said Friday the minister has “full confidence” in the bank.
Political concern may nonetheless be warranted. Trudeau’s Liberal party under a former leader swept to power in 1993 and won three subsequent elections — all of them while interest rates were stable or falling and the economy was relatively strong. “The working assumption of every central bank is more governments would favour more growth and looser policy,” said Doug Porter, chief economist at Bank of Montreal.
Rates are now projected to rise heading into Canada’s 2019 election, while growth is forecast to fall. The last time a Liberal government entered an election in the middle of a monetary policy tightening cycle was in 2006; that year, the Conservatives defeated them.
Output growth will peak this year at 2.6 per cent and slow in each of the next two years to 1.9 per cent in 2019, according to a Bloomberg survey. While still respectable — it’d be behind only the U.S. in the G7 — it’s nowhere near the level of growth being seen today. Sustaining the current pace would be a tall order.
“To me, that’s virtually impossible,” said Jean-François Perrault, chief economist at Bank of Nova Scotia in Toronto. It would be “fantastical” to have growth anything close to three per cent in 2019, he said. “You’re in a world when growth is at least twice potential. That can’t be sustained.”
Trudeau came to power in 2015, a year when growth sagged to 0.9 per cent, partly by pledging new deficit spending on infrastructure and family tax cuts to prop up the economy.
The strong growth will likely cut Trudeau’s deficit figures and, as such, borrowing requirement. “They could choose to spend a part of that, and still have a lower deficit than we have in the budget, financed in part through higher revenues,” Perrault said.
Trudeau and Morneau have stayed quiet since the report that some of the prime minister’s officials are worried Poloz will stunt growth by moving too quickly on rates. Poloz nonetheless has backing from economists for hiking. “I think the Bank of Canada’s exactly right in doing what it’s doing,” said Randall Bartlett, chief economist of the University of Ottawa’s Institute of Fiscal Studies and Democracy.
Because of how the Bank of Canada has incorporated federal fiscal projections in its forecasts, there’s a risk markets might over-read any tension over rates and interpret the government “as having more influence on the governor than it would past Bank of Canada governors,” he said. “The risk is still small and likely won’t influence market decisions unless the prime minister or finance minister say something publicly.”
Governor Stephen Poloz, meanwhile, may not move all that quickly. “Beyond the nearterm, a return to a more cautious communication strategy and pace of interest rate increases is expected in light of the headwinds facing Canada,” including slow inflation growth, TorontoDominion Bank senior economist Brian DePratto said in a research note.