Canada faces some se­ri­ous head­winds that seem likely to over­power what we have go­ing for us.

The Globe and Mail Metro (Ontario Edition) - - News - DAVID ROSEN­BERG

Iwrote re­cently that Canada al­ways seems to find a way to come through even as we shoot our­selves in the foot.

So here’s the good:

The coun­try is run­ning a very pro-growth im­mi­gra­tion pol­icy and at­tract­ing high-skilled work­ers and en­trepreneurs. A high­tech mecca is be­ing es­tab­lished both in On­tario’s Kitch­ener-Water­loo cor­ri­dor and in Mon­treal and the sur­round­ing ar­eas. Quebec has emerged from a sec­u­lar down­turn and is now im­prov­ing its trans­porta­tion in­fra­struc­ture while the strength­en­ing pro­vin­cial bal­ance sheet is al­low­ing for long-awaited tax re­lief. If it weren’t for the lan­guage is­sue, I am cer­tain that the econ­omy there would be in full-fledged boom mode. But suf­fice it to say that we are in one of th­ese rare pe­ri­ods since the PQ vic­tory in 1976 in which la belle prov­ince is a na­tional growth leader.

Else­where, Al­berta’s near-two year down­turn is in the rear-view mir­ror even if it ends up tak­ing a decade for the prov­ince to rein­vent it­self and di­ver­sify as Texas man­aged to do three decades ago. Oil prices thank­fully have sta­bi­lized just enough to keep pro­duc­tion flow­ing but not enough to en­tice new en­ergy in­vest­ment. Cy­cle-high ca­pac­ity uti­liza­tion rates na­tion­ally are spurring on stepped-up busi­ness spend­ing plans nec­es­sary to ease loom­ing pro­duc­tion bot­tle­necks. And the labour mar­ket has tight­ened suf­fi­ciently to al­low for some much­needed wage gains. This will help act as an an­ti­dote for softer bank lend­ing as guide­lines tighten be­cause of reg­u­la­tory shifts ahead and as house­holds move more force­fully to shore up debt-heavy bal­ance sheets.

Here is the bad:

While so many pun­dits were pat­ting them­selves on the back for Canada’s sud­den emer­gence as the Group of Seven growth leader this year, it is abun­dantly ev­i­dent that much of the spurt was noth­ing more than an elas­tic-band ef­fect that owed to a myr­iad of tran­si­tory in­flu­ences. The end of the plunge in en­ergy-re­lated ac­tiv­ity is not the same as a new bull phase, which isn’t hap­pen­ing for a whole host of rea­sons, from an in­co­her­ent pipe­line pol­icy at the govern­ment level to the re­al­ity that the term “peak oil” to­day refers to global de­mand for fos­sil fu­els and no longer sup­ply. Al­berta’s re­ces­sion is over, but sta­bi­liza­tion at a low level is not quite the same as a sus­tained growth re­vival. The re­cov­ery in man­u­fac­tur­ing ex­ports over the past 12 to 18 months had more to do with the com­pet­i­tive ben­e­fits of the dol­lar’s de­pre­ci­a­tion than any­thing else, and that boost has proven to be brief given the loonie’s ap­pre­ci­a­tion from the spring­time lows.

And the ugly:

The un­cer­tain­ties that the Bank of Canada (BoC) men­tioned in its most re­cent post­meet­ing me­dia state­ment have de­te­ri­o­rated since that time. As the rest of the world is at least try­ing to make ef­forts to cut taxes (the United States, Ger­many and France), Ottawa in­stead has been head­ing in the other di­rec­tion and is con­tin­u­ing in this naive quest to level the play­ing field in­stead of fo­cus­ing on cre­at­ing in­cen­tives to ex­pand the en­tire eco­nomic pie. Fis­cal pol­icy in Canada is clearly head­ing in an anti-growth di­rec­tion, off­set­ting the ben­e­fits of the fast­track­ing of high-skilled for­eign labour en­try.

At the pro­vin­cial level, a ris­ing num­ber of ju­ris­dic­tions, in­clud­ing On­tario, are dra­mat­i­cally rais­ing min­i­mum wages, which pan­ders to pop­ulism, but is a hor­ri­ble eco­nomic pol­icy that al­ways back­fires since all it does is erode real in­comes and/or squeeze small-busi­ness profit mar­gins. Elec­tric­ity costs are poised to soar 70 per cent in On­tario in the com­ing decade. And, as men­tioned, there is no fed­eral strat­egy to ship our oil or nat­u­ral gas out of the coun­try.

The U.S. Depart­ment of Com­merce is sin­gling out Cana­dian in­dus­try with mas­sive tar­iffs and the North Amer­i­can free-trade agree­ment talks seem to be in dis­ar­ray – the Amer­i­cans want to dis­pose of the dis­pute-res­o­lu­tion mech­a­nisms, which for years have kept pro­tec­tion­ist U.S. trade mea­sures at bay. U.S. Pres­i­dent Don­ald Trump may be golf­ing bud­dies with Brian Mul­roney, but I can tell you he, along with U.S. Sec­re­tary of Com­merce Wil­bur Ross, are no friends of ours.

New reg­u­la­tory rules also are com­ing our way, which will im­pinge on the seg­ment of the hous­ing mar­ket that isn’t in­sured by Canada Mort­gage and Hous­ing Corp., and most defini­tively have a dele­te­ri­ous im­pact on the high­priced ar­eas of the coun­try, such as the Greater Toronto Area, which al­ready is in cor­rec­tive mode. New cap­i­tal­iza­tion re­quire­ments for the banks, ex­pected next year, will likely also trig­ger less credit cre­ation and serve as a fu­ture con­straint on bor­row­ing and spend­ing ac­tiv­ity. And all the while, the Bank of Canada has sounded more hawk­ish than dovish of late, and we are just two or three more rate hikes away from BoC Gover­nor Stephen Poloz et al. in­vert­ing the yield curve. And for those of us who have a sense of eco­nomic his­tory, we all know what that means.

All in, Canada faces some se­ri­ous head­winds that seem likely to over­power what tail­winds we have go­ing for us. I don’t know how it is with all the chal­lenges that cannabis is a top pri­or­ity for the fed­eral govern­ment, un­less this is a cash cow for Ottawa to de­ploy in its pet spend­ing projects. Or maybe one should look at the bright side in­so­far as the rev­enue stream from le­gal­iz­ing mar­i­juana will pre­vent Ottawa from any fur­ther move to drain fi­nan­cial re­sources from the pri­vate sec­tor. Ei­ther way, Canada seems rud­der­less at the mo­ment, and that is a prob­lem, and gov­ern­ments across the coun­try are lean­ing to­ward the left and be­com­ing in­creas­ingly pop­ulist at the ex­pense of eco­nomic progress. We shall see the ex­tent to which the drive to at­tract tal­ent from across the planet will prove to be an off­set, all the more so with this gift from the xeno­pho­bic ap­proach to­ward im­mi­gra­tion south of the border, to our ben­e­fit. All that said, when we have reached a point where the Quebec econ­omy and fis­cal fi­nances be­comes the envy of the coun­try, we know we are into a whole new era.

What does it all mean from a mar­kets stand­point? Well, it tells me that the BoC re­ally has much more lim­ited room to tighten mone­tary pol­icy fur­ther, re­gard­less of what the U.S. Fed­eral Re­serve ends up do­ing (and it looks as though Janet Yellen wants to leave her suc­ces­sor a clean slate and to avoid the rep­u­ta­tion of leav­ing who­ever it is with a pol­icy stand that could be per­ceived as be­ing too ac­com­moda­tive). As­sum­ing com­mod­ity prices – es­pe­cially oil – range-trade from here, then I be­lieve that, trad­ing against the green­back, the Cana­dian dol­lar will re­main stuck in a $1.20 to $1.30 (or 76.92 to 83.3 cents U.S.) band for the fore­see­able fu­ture. But I sense that the re­cent cor­rec­tive phase has not fully played out and, be­fore turn­ing bullish again, I would like to see the top end of that band hold – all the more so since it rep­re­sents a crit­i­cal tech­ni­cal thresh­old at the 200-day mov­ing av­er­age.

David Rosen­berg is chief econ­o­mist with Gluskin Sh­eff + As­so­ci­ates Inc. and au­thor of the daily eco­nomic news­let­ter Break­fast with Dave.

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