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Business Briefing U.S.-China trade war is smiting Canada’s economy (and alarming the Bank of Canada)

Briefing highlights

  • U.S.-China trade war hitting Canada
  • Bank of Canada holds key rate steady
  • Central bank cites Washington-Beijing spat
  • Canadian dollar spikes
  • Canada’s trade deficit swells
  • U.S. trade gap with China widens
  • Markets at a glance
  • Purdue prepares for Chapter 11
  • Starbucks sees slower growth

smite

verb [T]. LITERARY

to hit someone forcefully or to have a sudden powerful or damaging effect on someone

— Cambridge Dictionary

The U.S.-China trade war is smiting Canada’s economy.

And we saw some of the impact today when the Bank of Canada held its key interest rate steady, but cited the escalating trade conflict.

Bank of Montreal recently estimated the hit to China’s economy at 1.5 per cent of gross domestic product over the course of a year.

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It pegged the toll on the U.S., which plays into how Canada fares, at 0.5 per cent over the same period.

“The effect on Canada, including that of a slower U.S. economy, is 0.4 per cent of GDP,” said BMO senior economist Sal Guatieri.

“The tariff toll is still manageable and partly offset by stimulative policies (notably in China),” he added in a recent report.

“However, we are likely nearing a tipping point where the extreme unpredictability of trade policies causes U.S. firms to slam the brakes on spending and even curb hiring.”

Just over half of that hit to Canada is because of slower U.S. growth, Mr. Guatieri added in an interview.

The impact is material, he said, particularly given that the pace of Canada’s economic growth is believed to be slowing.

IHS Markit Canada’s latest look at the manufacturing sector also showed the impact of the trade battle, its purchasing managers index slipping to 49.1 for August from 50.2 in July, with the 50 mark separating expansion from contraction.

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New orders have slumped for six consecutive months, IHS said, noting the August decline was the fastest since late 2015.

“Survey respondents noted that U.S.-China trade tensions, subdued energy sector spending and greater global economic uncertainty had all acted as a brake on client demand,” the group said.

“Moreover, export sales declined again in August, which manufacturers often linked to softer U.S. economic growth and worsening automotive sector business conditions.”

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Adrian Wyld/The Canadian Press

As The Globe and Mail’s Bill Curry reports, the Bank of Canada held its overnight at 1.75 per cent, boosting the Canadian dollar in the process as it gave no hint of a cut down the road, which markets are expecting.

Notable is that governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues cited the impact of the tariff war between Washington and Beijing.

“As the U.S.-China trade conflict has escalated, world trade has contracted and business investment has weakened. This is weighing more heavily on global economic momentum than the bank had projected in its July Monetary Policy Report,” it said in its statement.

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“In sum, Canada’s economy is operating close to potential and inflation is on target,” it added.

“However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. In this context, the current degree of monetary policy stimulus remains appropriate.”

Bank of America Merrill Lynch also warned of the impact of on Canada.

“The escalation of the U.S.-China trade war continues to weigh on the global economy,” Carlos Capistran, Bank of America’s Canada and Mexico economist, currency strategist Ben Randol and rates strategist Olivia Lima said in a lookahead to today’s decision.

"Canada trades more than 50 per cent of its GDP, so it is very exposed to global developments, and further global deceleration is likely to decelerate the Canadian economy through lower exports,” they added.

“There are several channels through which weaker global growth can have a negative impact on the Canadian economy.”

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Among them are the “mini-recession” facing global manufacturers, which will probably hit Canadian exports, the mounting threat of a U.S. recession, and the fact that weaker global demand could pressure oil prices.

“As the U.S. [Federal Reserve] cuts rates, the BoC will have to respond by cutting rates as well to avoid excess tightening of its monetary policy,” said Mr. Capistran, Mr. Randol and Ms. Lima.

“The Fed already cut 25 basis points in July, and we expect two more cuts (September and October), with risks of another cut in December given the recent escalation of the U.S.-China trade war,” they added.

“We do not expect the BoC to match the Fed in cuts one to one, but we believe it will have to respond to a certain degree.”

They projected the Bank of Canada will trim its benchmark before the end of this year and again in the first quarter of 2020.

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Trade deficit swells

And on that note, Canada’s trade deficit swelled in July to $1.1-billion, up from a revised $55-million in June.

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Exports slumped 0.9 per cent while imports climbed 1.2 per cent, Statistics Canada said today.

If you strip out prices, export volumes dipped 0.1 per cent.

The drop in exports was largely because of falling prices for energy products as the cost of oil exports dropped 7.4 per cent.

“Not a great story for net trade, but the imports signal a better pace for domestic demand,” said CIBC World Markets chief economist Avery Shenfeld.

The U.S. trade shortfall, in turn, narrowed in July to US$54-billion, though the gap with China climbed by almost 9.5 per cent.

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Markets at a glance

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Ticker

Purdue prepares for Chapter 11

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From Reuters: OxyContin maker Purdue Pharma LP is preparing to seek bankruptcy protection before the end of the month if it does not reach a settlement with U.S. communities over widespread opioid litigation, three people familiar with the matter said, after some states balked at the company’s US$10-billion to US$12-billion offer in August to end their lawsuits as part of a negotiated Chapter 11 case.

Google, YouTube to pay penalty

From Reuters: Google, which is owned by Alphabet Inc., and its YouTube video service will pay US$170-million to settle allegations that it broke federal law by collecting personal information about children, the Federal Trade Commission said on Wednesday.

Starbucks sees slower growth

From Reuters: Starbucks Corp. said Wednesday it expects 2020 profit growth to be lower than the current 10-per-cent rate, two months after the coffee house chain raised its 2019 profit forecast.

Lagarde sees long easy policy

From Reuters: The European Central Bank needs to keep policy loose for a long time but should carry out a broader review of policy that also takes into account global challenges like climate change, Christine Lagarde, the bank’s likely next president, said.

Required Reading

Canadian businesses in Bahamas grapple with aftermath

Canadian companies that provide energy and banking services in the Bahamas are still measuring the destruction left behind by Hurricane Dorian, the worst storm ever to batter the islands, James Bradshaw writes. With communications networks down and flooding so severe that rescue workers have struggled to reach some victims, power company Emera Inc. and banks such as Royal Bank of Canada and Canadian Imperial Bank of Commerce have been working to make contact with staff and send teams to begin recovery work.

Apartment investment running strong again

Investors spent a record $8.38-billion purchasing apartment buildings in Canada last year and another $4-billion in the first half of 2019, a sign that higher rents and low vacancy rates are attracting more capital to the sector, Janet McFarland reports.

Crescent Point to sell assets

Crescent Point Energy Corp. is selling $912-million in assets, a major step toward cutting its debt as it shifts its focus to core oil properties in Saskatchewan, Brent Jang reports. The Calgary-based company said Tuesday it reached private deals to sell all of its Uinta Basin oil assets in Utah for $700-million and some conventional oil properties in Saskatchewan for $212-million.

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