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Ontario Premier-designate Doug Ford speaks to the media following a meeting with industry representatives in Toronto on Wednesday, June 13, 2018

Tijana Martin/CP

Briefing highlights

  • Ford faces big challenges
  • A NAFTA scene I’d love to see
  • Markets at a glance
  • Household debt burden eases
  • ECB to end bond-buying program
  • U.S. retail sales surge in May

This is a first blush positive for markets given the promise of a corporate tax cut and a potential pivot away from increasingly left-leaning policy inclinations in recent years

— Eric Lascelles, RBC Global Asset Management, on the Ontario election

But on second blush, Ontario’s Doug Ford may already be in big trouble, and not know it.

It’s hard to tell what Mr. Ford does and doesn’t know, as he and his Progressive Conservatives won a majority last week on a campaign that was heavy on promises but light on finances.

Giving Ontario’s next premier the benefit of the doubt, he may have those numbers in his back pocket, and simply hasn’t shared them yet. If he doesn’t, get ready for a speech about how “the Liberals left us in far worse shape than we thought.” We’ll probably hear that, regardless.

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The deck is certainly stacked against the new government, partly through developments beyond its control.

“This is a first blush positive for markets given the promise of a corporate tax cut and a potential pivot away from increasingly left-leaning policy inclinations in recent years, though the party’s populist tinges leave many unsettled and a key issue will be whether the province’s mounting debt load will be seriously tackled,” warned Eric Lascelles, chief economist at RBC Global Asset Management.

(This assumes you don’t like left-leaning policy inclinations.)

First, a big unknown that’s potentially devastating is beyond the control of Mr. Ford and, seemingly, the federal Liberals, who hold a special place in the hearts and minds of the Trump administration.

The United States has already hit Ontario through its tariffs on Canadian steel and aluminum. The overall economic impact there isn’t huge, but looming now is the threat of 25-per-cent levies on imports of autos, the industry at the heart of manufacturing in Ontario.

“Production of vehicles and parts accounts for 1 per cent of Canada’s economy, a share that has held fairly stable in the past seven years, though falling from pre-recession levels,” said Bank of Montreal senior economist Sal Guatieri.

“Ontario’s share is more than double the national rate,” he added, noting that of the two million vehicles churned out in Canada in the last year, about 85 per cent were destined for the United States, which shares a highly integrated auto industry with its northern neighbour.

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“A reduction in auto production in Canada would have widespread knock-on effects to other manufacturers and service providers,” Mr. Guatieri said.

“The one saving grace is that U.S. producers are already operating near capacity and it would take years to build new plants to replace foreign supply. That’s assuming U.S. demand holds up to a sharp spike in car prices.”

New Ford Edges sit on a production line at the Ford Assembly Plant in Oakville, Ont.

Chris Young/The Canadian Press

As The Globe and Mail’s Justin Giovannetti, Greg Keenan and Steven Chase report, Mr. Ford met Wednesday with executives from the auto and steel industries, saying he would work with Ottawa to defuse a “NAFTA war.”

“I have to protect the auto workers, which is a massive industry, and my priority is to make sure we protect the steel and aluminum workers.”

That’s just one issue, albeit a big one. As my colleague David Parkinson writes, Mr. Ford will have his hands more than full because he’ll have to cut spending sharply to fund his tax promises.

Economists and credit rating agencies want to see the numbers behind Mr. Ford’s plans. Indeed, agencies had already looked askance at the plans of the now-ousted Liberals.

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“PC campaign documents and public statements suggest the incoming government will implement significant tax reductions, modestly increase program spending in targeted areas and make further investments in transit infrastructure,” said Canadian rating agency DBRS Ltd.

“Beyond finding $6-billion in efficiencies and some modest reductions in business supports, it is not clear how these commitments will be funded,” it added in a recent analysis.

“Similarly, it is not clear what measures from the Liberals’ March 2018 budget (passed in the days leading up to the election) will proceed under a PC government.”

DBRS said there are no “immediate rating consequences” for the incoming government, and that it expects the province will still be deemed “stable” for now.

BMO senior economist Robert Kavcic noted that the Conservative pledge for lower corporate and personal income taxes, killing cap-and-trade and further initiatives to bring down hydro and gas prices “famously did not include a bottom-line projection.”

But Mr. Kavcic has some numbers of his own.

“Tallying up the costed items and building off a base 2018 budget (i.e., before new measures – the same approach used in the fully projected NDP platform) very roughly suggest that the budget deficit could track in the $5-billion to $6-billion range by fiscal year 2020-21,” Mr. Kavcic said.

“That is before any ‘spending efficiencies’ are found, before any other items without a dollar figure in the PC platform, and before any changes to reporting standards as per the auditor general.”

Admittedly a “crude projection given the limited information at hand,” Mr. Kavcic noted it’s about in line with the other major parties in the campaign.

The major difference, he noted, is that the shortfall would be driven by lower taxes, rather than higher spending as in the past.

Nonetheless, a deficit is a deficit.

“A shift back into deficit at this later stage of the cycle opens the door to bigger challenges down the road,” Mr. Kavcic said.

“The bond market has already been charging more to lend to Ontario than Quebec, and the election campaign certainly hasn’t helped,” he added.

“Starting with the turn back into deficit in the 2018 budget (Liberals), spreads widened further versus Quebec, a province which continues to run modest surpluses.”

The biggie for businesses is that their confidence is “depressed”, Mr. Kavcic said, though Ontario would have the lowest corporate income tax in the country when the promise is met, at 10.5 per cent.

To be fair, Mr. Kavcic did note that the Conservative win was the “least bad” from a credit perspective, and that Mr. Ford’s victory marked a “significant turning point” away from higher taxes and major spending.

Mr. Ford faces other headaches, as well. Home sales have cratered, the auto industry “has likely peaked,” and export volumes are “fading.”

Mr. Ford mused during the campaign about ending the tax on foreign buyers of local real estate, part of the Liberal Ontario Fair Housing Plan.

But we’ll see if he goes that route given the housing market is finding its feet again, and one wonders about foreign money coming back in.

“On the plus side, Ontario is seeing some of the strongest demographic trends in more than a decade, with population growth accelerating on the back of new millennial households and migration from outside and within Canada,” Mr. Kavcic said.

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A NAFTA scene I’d love to see

Photo illustration

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Markets at a glance

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Debt burden eases

Canadians are curbing their voracious appetite for debt.

Well, new mortgage qualification rules could have something to do with that, too.

The key measure of credit market debt to household disposable income eased in the first quarter to 168 per cent from the fourth quarter’s 169.7 per cent, Statistics Canada said today.

That’s still high – it means we owe $1.68 for every dollar of disposable income – but it’s the right direction as policy makers try to bring down swollen debt levels that rose along with home prices.

Today’s numbers correspond to the new mortgage rules that came into effect at the start of the year, adding to rising rates.

Canadian consumers borrowed $22.2-billion in the first three months, down from $25.4-billion in the final quarter of last year, according to the statistics agency.

Notable was the $2-billion drop in mortgage borrowing, to $13.7-billion, which Statistics Canada said, was the lowest since the second quarter of 2014.

Net worth among households also dipped, by 0.2 per cent.

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