Investors eye hints next government will tighten purse strings
Investors are looking for signs that Canada's next government could dial back historic levels of fiscal spending to support the economy during the coronavirus crisis, with activity already on track to make a full recovery.
Political parties tend to use election campaigns to roll out new spending priorities. But additional measures at this time could concern the bond market and credit rating agencies, particularly if they do not boost economic growth. They could also add to inflation pressures.
Prime Minister Justin Trudeau is planning to call a snap election for Sept. 20, Reuters reported on Thursday.
Polls show the governing Liberal Party well ahead of the official opposition, the Conservatives.
“From an economic perspective we'd say we don't need more spending right now in the Canadian economy,” said Rebekah Young, director, fiscal and provincial economics at Scotiabank. “Markets will probably be looking for some sign of restraint; that an incoming government recognizes there is a lot already in the pipeline.”
Canadian government bond yields were little changed Thursday but the loonie and the main stock index edged lower as commodity prices fell, with stocks retreating from a record high on Wednesday.
“Elections cause a lot of uncertainty,” said Greg Taylor, portfolio manager at Purpose Investments. “More uncertainty could be something that would be a bit of a headwind to the market and may dampen future returns.”
In April, the government projected a $155-billion deficit for the current fiscal year, about eight per cent of GDP, and outlined a $101-billion plan over three years to boost economic recovery.
The economy is also expected to benefit from record levels of household savings and a high vaccination rate.
Ontario, Canada's most populous province, on Thursday raised its growth forecast for 2021 to five per cent from four per cent as it cut its deficit projection for the current fiscal year, in a sign that stimulus is already working.
Canadian employment has rebounded to 1.3 per cent below its pre-pandemic level and inflation has climbed above the top of the Bank of Canada's target range of one per cent to three per cent.