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Economy Lab

What economists expect from a Tory majority Add to ...

Monday's election results redrew the Canadian political landscape, handing Stephen Harper's Conservatives a majority government with the New Democrats becoming the official opposition for the first time in the country's history. The Liberals had their worst showing since Confederation while the sovereigntist Bloc Québecois was all but decimated.

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The dramatic result had little immediate effect on the currency. The Canadian dollar was little changed Tuesday, trading at $1.0496 (U.S.) from Monday's close of $1.0517.



What do the results mean for the Canadian economy and the currency? Some economists weigh in Tuesday:



Avery Shenfeld, chief economist, CIBC World Markets.



Implications for overall fiscal and monetary policy are likely to be modest in the near term, with the government likely to enact the budget it offered prior to the election. Fiscal restraint through contained spending growth in the next few years will be a partial substitute for more aggressive interest rate hikes, so the implications for the Canadian dollar are not as positive as it might seem on the surface.



The drop in support for the Bloc Québecois does not mark the end of the sovereignty issue in Québec, as the pro-sovereignty PQ party leads in polls on voting intentions for the next provincial election there. At the federal level, a Harper majority will have some sectoral policy impacts, including more foreign ownership in telecoms (for small entrants), and a cautious approach in greenhouse gas regulation that will likely mean awaiting for any U.S. action on that file.



Harper has had a generally open for business attitude on foreign ownership, but did block the takeover of Potash Corp., and has voiced some reservations about takeovers from foreign state enterprises. The majority win ensures that previously planned cuts to corporate tax rates this year will go ahead, which is a plus for equities.



Markets will like the reduced uncertainty. The Canadian dollar which appreciated as a majority government became more apparent, lost some ground this morning as oil prices softened a bit.



Mark Chandler and Kam Bath, fixed-income strategists, RBC Dominion Securities Inc.



From an economic and markets standpoint...the impact is expected to be relatively muted. The Conservatives had "watered down" budgets very little in the past few years to accommodate the opposition in the - now ratified - belief that they could win on their economic platform if they were pushed into an election.



We suspect the Conservatives will want to summon the nation's 41st Parliament in relatively short order - they took 37 days to do so from the time of the election in 2008 as compared to an average of 75 days in Canada's history. It also seems likely that the Budget presented in March will be passed largely intact and the plans to eliminate the deficit by 2014/15 will remain on track.



Importantly, their new majority stance allows more scope for the party to squeeze out public sector efficiencies needed for their tax initiatives. To the extent spending restraint caps wage pressures in the public sector (see our discussion in last week's Global Directions attached) it may make the Bank of Canada more comfortable that labour costs will be constrained. Given that many of the Conservatives campaign promises were made contingent on achieving a balanced budget, it also behooves the government to accelerate the deficit reduction where possible - in Ottawa, it is never too early to starting laying the groundwork for the next election just four short years away now.



Derek Holt and Karen Cordes Woods of Scotia Capital



If there was an election effect in overnight Asian and London trading, then it disappeared in a hurry. The Canadian dollar had strengthened at first while the late evening results increasingly pointed toward an opposition-stifling Conservative majority that discounts the significance of whomever sits on the other side.



I went to bed fully expecting the rally to march further, only to awake to markets that had fully shaken off the effects and returned the Canadian dollar to where it was pre-election results due to broadly based and renewed U.S. dollar strength after a miserable slide lower.



If there is any election effect stemming from a Conservative majority, then so far it is tiny and nearly impossible to discern relative to a host of other more important factors.



Theoretically, the results could be bullish by restoring certainty over corporate tax policy and the environment for foreign and domestic investment, enhancing fiscal stability compared to alternatives, and removing the Quebec separatist agenda entirely from Federal parliament.



Then again, markets were fine with the checks and balances of minority governments, so the theoretical impact was always in doubt. But as we noted throughout the campaign, global markets have bigger issues to think about than the fourth Canadian election in seven years that might finally buy four years of peace and take Canada out of the league of Italy and Japan in terms of political instability across developed nations.



Those issues include the reduced appetite for risk on waning U.S. growth figures, how that translates into monetary policy as a symptom rather than a root cause of market turmoil, looming U.S. fiscal worries in light of each of the debt ceiling, the approaching election year and rating agency warnings and ongoing European debt concerns.



Derek Burleton, Sonya Gulati and David Tulk at TD Securities



Yesterday's election result will likely be perceived as market friendly.



This is because investors generally dislike uncertainty, and the outcome promises a stay-the-course policy path, including lower corporate income tax rates and political stability for another four years. Notably, the budget tabled in March - which was victim to the election call - is likely to be passed in the coming weeks with only some modest tweaks.



The commitment to prudent fiscal management will be favourably received by markets and investors. Furthermore, bringing forward the timetable by one year would heed the recommendation made recently by the International Monetary Fund (IMF) to prioritize fiscal consolidation efforts. A shorter deficit reduction timetable would also help the government avoid heightened risk premiums at a time when worldwide financing needs are expected to be significant. While medium-to-long term government bond yields are expected to creep up over the next few years due to upcoming interest rate hikes, the relatively strong fiscal footing of Canada should keep the increases in check. Yesterday's election results do not give us reason to change our call for interest rates to begin their gradual increase starting in July of this year.









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