Trudeau’s moment of truth at the G7
The global buying opportunity in the loonie
Global investors in loonie-denominated investments have to be thinking of the loonie’s upside potential over the next few months. The Bank of Canada is getting bolder in its expectations of stronger than earlier forecast GDP growth this year, justifying a string of hikes in its key lending rate. A strengthening loonie is, of course, a kicker for any security, property or industrial investment whose value is measured in Canadian currency. One of the year’s biggest under-reported stories is the extraordinary performance of the loonie: It has been the best-performing currency among 16 advanced economies for the past two months. The optimism flavouring the BoC’s most recent rate decision last week suggests a considerable further hike in the loonie’s value in the medium term, even as global investors have already begun pushing up the yield on Canadian bonds in recent weeks.
The further upside is, or should be, obvious from the BoC’s goal of getting rates from their current 1.25 per cent to the Goldilocks rate of 3 per cent — the BoC’s “neutral rate” that prevents economic overheating without slowing GDP growth. Yes, global uncertainties remain, everything from Brexit to U.S. tariff bullying to slow progress on a renegotiated North American Free Trade Agreement (NAFTA). But the central bank and Canada’s Big Five lenders, while still concerned about the record Canadian household debt that has constrained rate hikes until last year, are less fraught over potential disruptions in the retail credit market. Meanwhile, the abundance of positive signs includes strong income growth, a likely housing rebound and surprisingly strong exports and corporate investing in plant and equipment. The world needs more Canada
As host of this week’s G7 summit in Charlevoix, Que. (June 8-9), Justin Trudeau is expected speak on a long-held theme of his government: improving economic opportunities for women. “You create better success, better growth for our countries and our world when we include women,” Trudeau said last week. But if prompted, the PM might digress at Charlevoix into the increasingly sharp contrast between U.S. and Canadian economic stewardship. Corporate Canada continues to whine over potentially being made uncompetitive after U.S. President Donald Trump’s massive tax cuts last December.
That argument has never cut ice with Trudeau, who has recently shifted from defending Ottawa’s economic governance to sharply critiquing America’s. The U.S. tax cuts call into question America’s longterm fiscal stability, Trudeau said in a Toronto interview with Bloomberg News last Tuesday. And in a U.S. economy Trudeau described as “ruthless,” tax cuts skewed to the rich in the absence of the social-infrastructure investments his own government has undertaken, risks social upheaval. “You’re going to exacerbate tensions that ultimately aren’t profitable for business,” the PM said, echoing a theme of the Occupy movement. Despite Canada’s economic-justice expenditures, Canada’s projected modest deficit of 0.8 per cent of GDP in the current fiscal year will be among the lowest in the G7. The facts speak for themselves. America’s federal debt-to-GDP ratio was 105.4 per cent last year, to Canada’s forecast 30.1 per cent in fiscal 2018-19. Americans’ individual share of the U.S. debt of $27.2 trillion (Canadian) works out to $81,036 per capita. The comparable figure for Canadians is $18,053. It will be interesting to see how Trudeau frames his U.S. critique at aG 7 summit with Donald Trump in the room. Atrade bully without a mandate
Remarkably enough, Donald Trump will be among friends — relatively speaking — at this week’s G7 summit in Charlevoix. True, the U.S. president has just launched a trade war against five of the seven countries whose heads of state will be present at the summit. And Trump is girding for a trade war with the remaining G7 country, Japan, on the same specious national-security grounds he invoked with his steel and aluminum tariffs against Canada, Mexico and the European Union last week. Yet, while Trump stands to get an earful about that from his fellow G7 leaders at their summit this weekend, he might be relieved to be away from Washington. The U.S. capital is where the fiercest criticism of Trump’s protectionism is to be heard. And it’s coming from leading Republicans, livid that “their” president has usurped the authority of the legislative branch in weaponizing U.S. trade policy.
Paul Ryan, the U.S. House speaker, is enraged with Trump for trade bullying that targets “America’s allies when we should be working with them to address the unfair trading practices of countries like China.” U.S. Senator Orrin Hatch, who oversees trade issues in the Senate, said Trump’s “tariffs on steel and aluminum are a tax hike on Americans and will have damaging consequences for consumers, manufacturers and workers.” And U.S. Senator Ben Sasse of Nebraska said of Trump’s trade war: “This is dumb. Europe, Canada and Mexico are not China, and you don’t treat allies the same way you treat opponents.” Sasse cited the role of protectionism in deepening the Great Depression. “Make America Great Again shouldn’t mean Make America 1929 again,” he said. All to say, if Trump has a domestic mandate for his scattershot trade war, it’s a fragile one.