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Briefing highlights

  • On budget deficits
  • Stocks, loonie, oil at a glance
  • Baker raises HBC bid
  • Boeing shares downgraded
  • Required Reading

On budget deficits

Don't freak out over our budget deficits.

First, remember that Canada holds a coveted triple-A rating, and it doesn’t look like the various election outcome scenarios would threaten that.

Then, consider that analysts don’t appear overly troubled, though some have issues.

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Observers will tell you that it’s always smart fiscal policy to get deficits under control in good times so that governments have the flexibility they need in bad times. And, as has been noted often, this current, long-running economic expansion has to end at some point.

That aside, “debt sustainability is not a current issue for Canada,” JPMorgan Chase currency strategists Patrick Locke and Daniel Hui said in a recent report to clients about Canada’s election.

"The federal deficit would wind down under Conservatives, and only modestly contract under Liberals, but ultimately the numbers are modest in the context of growth forecasts and the macro outlook," they added.

Then, too, consider Canada in a global context.

“At 31 per cent of GDP, the federal debt looks very favourable compared to the U.S., where the federal debt-to-GDP ratio is 77 per cent,” said Stephen Brown, senior Canada economist at Capital Economics.

Ditto proposed deficits.

“Both election policy platforms point to more fiscal stimulus and higher deficits ahead,” RBC Dominion Securities technical strategist George Davis said.

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"However, the projected deficits do not represent a major departure from the 1 per cent of nominal GDP anticipated in the next few years.”

How do observers see that number?

"This is a very small number when considering the U.S. is running close to 5 per cent," said Ian Pollick, head of North American rates strategy at CIBC World Markets.

Then, too, how much stock should we put in longer-range targets?

"Experience suggests that we shouldn’t pay too much attention to a party’s fiscal proposals beyond the next year or two, not least because economic conditions can turn out far differently than expected," said Mr. Brown of Capital Economics.

"The key point is that the two parties would deliver similar budget deficits for the next fiscal year."

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Financial observers tend to focus on the plans of the Liberals and Conservatives, for obvious reasons, with little attention to the fiscal policies of other parties.

Having said that, of late they’ve been considering the prospect of a minority government being propped up by more of those other parties.

Here are comments I’ve collected over the course of the campaign that relate to government finances. Some have been published before.

“A Liberal government maintaining power, even if it is a minority government in which Liberals partner with a further-left party, would likely imply more fiscal stimulus over the coming years. However, this scenario would likely also imply a more negative outlook for the energy sector … which could counteract some of the perceived fiscal support. A lower-regulation, lower-tax environment implied by a Conservative government would also likely be perceived initially as market-friendly, although as we have previously explained, the more medium-term economic boost from Conservative party proposals is more uncertain and likely smaller than direct spending measures would imply.” Veronica Clark, associate, U.S. economics, Citigroup

“The public finances would of course deteriorate rapidly in the event of a severe recession. While that is not our baseline forecast, we have argued that elevated household debt means there is a higher chance of a severe recession in Canada than in most other advanced economies. In the current environment of ultra-low bond yields, however, we doubt that a big widening of the fiscal deficit would cause a surge in the government’s borrowing costs. Accordingly, in the event of a severe downturn, we think the government would have ample fiscal space with which to support the economy.” Mr. Brown, Capital Economics

“None of the major parties … have campaigned on aggressively trimming the federal budget deficit in the near term. From a purely Canadian economic growth perspective, the risks are probably tilted to a slightly larger support to near-term growth coming from the government sector.” Nathan Janzen and Josh Nye, senior economists, Royal Bank of Canada

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“While there isn’t a huge gap in the overall proposed thrust of fiscal policy, details differ widely, especially when considering some of the proposals of other parties – with potentially big implications for the energy sector at the very least. Suffice it to say, the preternatural calm of the Canadian dollar during the campaign is a surprise.” Douglas Porter, chief economist, Bank of Montreal

“It is impossible to tell what specific policies may end up being adopted in a Liberal/NDP/Green arrangement, but if the Liberals can adopt the fiscal framework from their campaign, we’ll be expecting deficits in the range of $21-billion to $27-billion through 2023-24 … If the Conservatives were to govern … and adopt their campaign fiscal framework relatively intact, the deficit would not look that much different than the Liberal outlook next year (~ $4-billion lower). However, by the end of a prospective four-year mandate, the deficit is projected to be about $16-billion smaller (or roughly 0.6 per cent of GDP).” Mark Chandler, head of Canadian rates strategy, and Simon Deeley, rates strategist, RBC Dominion Securities

“One issue that has cropped up in this election campaign is the idea that Canada’s public finances are in worse shape than the federal debt-GDP ratio alone might suggest … Once we include the debts of the provinces and local government … Canada’s public debt-to-GDP ratio climbs to 90 per cent of GDP … There are two key reasons not to be concerned about this, however. First, unlike in other countries, Canada has already made substantial efforts to improve the sustainability of its public pension system … The second reason why we should not be overly concerned by the high overall debt burden is that the most indebted provinces, Ontario and Quebec, have been getting their budgets under control.” Mr. Brown of Capital Economics

“From a debt standpoint, the Liberals plan larger deficits while the Conservatives pledge to balance the budget over several years. That said, even the Liberal plan would allow the federal debt-to-GDP ratio to decline over time – a key measure of fiscal sustainability. Of course, the occasional recession has a nasty habit of blowing even the best-laid fiscal plan well off course – it would be better if Canada was running a modest surplus with an unemployment rate at the lowest in more than a generation.” Eric Lascelles, chief economist, RBC Global Asset Management

“While the debt-to-GDP ratio [under the Liberals] is still forecast to remain on a downward trend (stable around 31 per cent), the implication for Canada’s bond market is the amount of spending not accounted for by new revenues." CIBC’s Mr. Pollick

Read more

Markets at a glance

Read more

Baker raises HBC bid

A group led by Hudson’s Bay Co. executive chairman Richard Baker raised its takeover offer for the department store chain by $100-million, winning approval for the bid from members of the board of directors, The Globe and Mail’s Andrew Willis reports.

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Now the 53-year-old real estate executive and his backers need to convince the majority of HBC’s remaining shareholders to take their cash, rather than continuing to own a stake in a 350-year-old retailer.

Mr. Baker, a group of private equity funds and an arm of WeWork Companies Inc. boosted their offer for the 43 per cent of HBC they do not own to $10.30 a share, up from an opening bid of $9.45 a share in June.

Read more


Boeing shares downgraded

From Reuters: Boeing Co. may have to book billions of dollars in additional charges, two brokerages said, following the latest developments around the plane maker’s grounded 737 Max jet that calls into question the timing of the aircraft’s return to service. Credit Suisse and UBS downgraded the stock after reports on Friday showed internal messages between two Boeing employees stating the plane’s anti-stall system behaved erratically during testing before the aircraft entered service.

Tariffs could be pulled

From Reuters: White House economic adviser Larry Kudlow expressed optimism about ongoing U.S.-China trade talks, and said tariffs scheduled for December could be withdrawn if negotiations continue to go well.

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Coty explores options

From Reuters: Coty Inc. is looking to sell its business unit that houses brands such as Wella, Clairol and OPI as part of an ongoing plan to streamline its operations and cut debt, sending its shares up. The company said it was also exploring options for its Brazilian unit as it focuses on its fragrance, cosmetics and skin care businesses.

Halliburton profit falls

From Reuters: Oilfield services provider Halliburton Co. reported a 32-per-cent slump in quarterly profit, hit by a slowdown in shale drilling in North America, its biggest market. Net profit attributable to Halliburton fell to US$295-million, or 34 US cents a share, in the third quarter ended Sept. 30, from US$435-million, or 50 US cents, a year earlier.

German economy may have contracted

From Reuters: The German economy may have contracted in the three months to September, and a slowdown in exports is now threatening to affect the domestic economy as well, the Bundesbank said. “Germany’s economic output could have shrunk again slightly in the third quarter of 2019,” the country’s central bank said in a monthly report. “The decisive factor here is the continued downturn in the export-oriented industry.”

China seeks sanctions

From Reuters: China is seeking US$2.4-billion in retaliatory sanctions against the United States for non-compliance with a WTO ruling in a tariffs case dating to the Obama era, a document published on Monday showed. WTO appeals judges said in July that the United States did not fully comply with a WTO ruling and could face Chinese sanctions if it does not remove certain tariffs that break the watchdog’s rules.

Required Reading

Ontario looks to private sector for cannabis distribution

Ontario’s cannabis agency is looking at ways to boost the private sector’s role in the wholesale distribution of cannabis amid industry concerns that the provincial wholesaler is stocking products that consumers don’t want at prices that can’t compete with the black market. Mark Rendell reports.

Bank jobs upended

Technology advances are upending tens of thousands of jobs across the global financial sector, including at Canada’s big banks. James Bradshaw reports.

Crucial earnings season kicks off

With Canadian stocks having their strongest year in a decade, a pivotal earnings season will put those gains to the test in the weeks ahead. The torrent of third-quarter financial results gets started this week, and the expectations going in are low, Tim Shufelt writes.

Spurring demand

Projections of a sharp slowdown in U.S. shale production in the next couple years could bode well for demand for Canadian oil, but the sector still must contend with stalled pipelines and a transportation capacity crunch. Emma Graney reports.

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