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business briefing

Briefing highlights

  • Morneau’s ‘political minefield’
  • Stocks, Canadian dollar, oil at a glance
  • Manufacturing sales slip amid strike
  • Required Reading


As Bank of Nova Scotia puts it, Bill Morneau’s challenges make for a “political minefield.”

The federal finance minister faces extreme pressure trying to pull everything off, particularly under a minority government, as became even clearer when he unveiled his economic and fiscal update Monday.

“Minister Morneau once again takes the reins of the Canadian economy, this time facing a slowing economy and stretched household balance sheets following a prolonged period of global uncertainty,” said Rebekah Young, Scotiabank’s director, fiscal and provincial economics.

“In a minority government context, he faces a political minefield at all levels of government as he steers the fiscal path forward.”

Finance Minister Bill MorneauAdrian Wyld/The Canadian Press

As The Globe and Mail’s Bill Curry reports, the Liberal budget deficits are under pressure from a hefty adjustment to pension and benefit costs, plus the government’s tax changes.

That means fatter-than-planned deficits, at a time that Mr. Morneau’s mandate letter says that, among other things, he has to “continue to reduce the government’s debt as a function of our economy,” and preserve Canada’s coveted triple-A credit rating.

That rating is not currently under threat, by the way.

But Monday’s statement showed just how difficult Mr. Morneau’s task will be.

Toronto-Dominion Bank senior economist Brian DePratto calculated the long-term hit like this:

The deficit increases by $27.8-billion through fiscal year 2023-24. Stronger-than-forecast revenues would mean an additional $13-billion over the five years. Add to that $1.5-billion in annual revenue that’s supposed to come from a spending review. What you end up with are deficits about $7-billion more on average than expected, pegged at $28.1-billion in the next fiscal year.

Keeping in mind that that deficit is seen as modest, at about 1.2 per cent of gross domestic product, one can still make the argument that this government is broke. And it’s not the best time for being broke.

The government is so broke that:

It faces trouble on the debt side

“Just days after receiving his mandate, the minister already falls short of a key fiscal anchor of declining debt as a function of the economy,” said Scotiabank’s Ms. Young.

“The debt-to-GDP ratio will in fact increase marginally this year to 31 per cent of GDP, where it will stay until [fiscal year 2022] before it begins to decline marginally,” she added.

“With substantial platform commitments still outstanding, the minister will face tough choices if he is to credibly reset debt on a downward trajectory as per his mandate.”

Not only that, Ottawa’s projections are based on “steady economic growth,” noted Royal Bank of Canada senior economist Josh Nye.

“Any economic downturn in the coming years would cause debt-to-GDP to rise substantially, as did a decade ago,” he said.

“Canada’s debt-to-GDP ratio is still two percentage points higher than it was prior to the 2008/09 recession.”

There’s little room to deviate

The government “has less flexibility to embark on major new spending measures, unless policy makers are willing to ram up revenues elsewhere, or they are willing to let the deficit run even higher,” said Bank of Montreal chief economist Douglas Porter.

“Given the advanced nature of this economic cycle, and an already tight job market, such a deficit bump seems far from prudent.”

Scotiabank’s Ms. Young agreed.

“There is little headroom left for additional platform commitments absent additional revenue-generating measures,” Ms. Young said.

“Recall, net new spending under the Liberal platform amounted to about $4-billion next year [fiscal year 2021] ramping up to $9-billion by [fiscal year 2024],” she added.

“Net metrics obscured a much bigger spend with one part savings measures to offset two parts of new spending pledges. This update wisely holds off on additional spending commitments in light of the current debt ratio path.”

It will be hard to prepare for the next recession

No, economists aren’t saying we’re staring a recession in the face. But there’s going to be one at some point, particularly given the long-running nature of the current expansion.

And, as Ms. Young noted, Mr. Morneau has to be ready for that.

“In past Canadian recessions, deficit spending has typically increased between 3 to 6 per cent of GDP (peak-to-trough) above and beyond its starting fiscal position,” Ms. Young said.

“We have estimated Canada would need to run a deficit peaking at around 4 per cent of GDP (or about $75-billion annualized over six quarters) to respond to a recession today,” she added.

“Beyond preserving fiscal firepower, the minister would be wise to also evaluate his policy tools to tackle a recession before they are needed including strengthening automatic stabilizers.”

The Bank of Canada may have to do more than it counted on

When it recently held its benchmark overnight rate steady at 1.75 per cent, the central bank said it would take federal fiscal measures into account when it next updates its projections.

It stands by to cut rates if needed, but so far has marched to its own drummer, holding that key rate steady while other central banks eased.

“If the federal government can't offer much more on the fiscal front, the onus will fall more heavily on the bank, should the economy soften more than expected in 2020,” said BMO’s Mr. Porter.

“In other words, it looks like government spending will be less stimulative than previously believed next year, slightly increasing the odds of rate cuts.”

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Markets at a glance

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Manufacturing sales slip amid strike

Canadian manufacturers suffered their second consecutive down month in October as sales slipped 0.7 per cent.

When you strip out price effects, volumes were down 0.4 per cent.

Sales of durable goods declined by 2.4 per cent, while those on the non-durable side of the ledger gained 1.3 per cent, Statistics Canada said.

At play here was a strike against General Motors Co. in the U.S., whose impact was felt in Canada.

“Canada’s factory sector has been moving largely sideways for the past year and half, but in October it at least had an excuse in the impact of a U.S. auto strike on activity here,” said CIBC World Markets chief economist Avery Shenfeld, citing the fact that the overall drop in shipments was “heavily weighted” to autos and parts, with little real change elsewhere.


French strike cripples transport

From Reuters: French trade unions crippled transport, shut schools and brought demonstrators into the streets on Tuesday in a redoubled effort to force President Emmanuel Macron to ditch a planned pension reform by Christmas. Unions called the nationwide mobilization hoping for a new jolt to regain momentum, after a movement of rolling strikes and protests had started to tail off in recent days.

Unilever warns of sales miss

From Reuters: Unilever Plc will miss its underlying sales target this year, the consumer goods giant warned on Tuesday, sending shares in the maker of Dove soap and Ben & Jerry’s ice cream into a steep fall. In an unscheduled trading update, Anglo-Dutch Unilever also struck a downbeat tone on its prospects for meeting its mid-term target for sales growth of 3 to 5 per cent next year.

Banks slide on stress tests

From Reuters: Shares in Lloyds Banking Group and Royal Bank of Scotland tumbled in early trading on Tuesday after failing to impress in the 2019 stress testing of Britain’s biggest banks. Both banks passed the Bank of England’s annual assessment of balance sheet strength but plans to double a 100 basis point capital buffer designed to protect lenders in depressed economic conditions could put both bank’s 2020 share buyback plans in jeopardy, analysts said.

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