On Monday, two key decisions will be made that will help chart Canada's economic future. One involves roughly 15 million voters at polling stations from coast to coast to coast. The other involves six central bankers in a boardroom in a nondescript Ottawa office tower.
The federal election is the big event on the business and economic calendar this week, with the two contenders most likely to form the next government – Stephen Harper's incumbent Conservatives and Justin Trudeau's Liberals – offering two quite different paths for fiscal and economic policy for the next four years.
A Harper government would follow the policy blueprint it pursued in its previous mandate – delivering tax cuts while striving for balanced budgets. The rationale is that economic growth is best promoted by minimizing the footprint of government while maximizing the money staying in the hands of the people. It's a policy that places much of its faith in consumer and market forces to steer demand and investment.
A Trudeau government, by contrast, would run short-term budget deficits in order to dramatically increase government investment in restoring, upgrading and expanding Canada's public infrastructure. It's a decidedly bigger-government vision, grounded in the belief that the public sector must step up to invest in these vital foundations upon which an efficient, productive and competitive economy is built.
That said, the election result should be largely a non-event for the economy and financial markets in the near term, despite the typical potential for some mild market hiccups as traders digest the news.
"Although policy initiatives differ across parties, the planned budget balances are similar, with the Conservatives and NDPs proposing balanced budgets, while the Liberals plan for small (in a historical and cyclical volatility context) deficits in the first three years," Royal Bank of Canada's fixed-income and currency strategy team said in a research note. "Elections do not have a major impact on the Canadian dollar."
At the same time as Canadians are streaming to the polls, the governing council of the Bank of Canada will be finalizing its latest interest-rate decision, as well as nailing down the final draft of its quarterly Monetary Policy Report, a key document detailing the central bank's outlook for the economy; both will be released Wednesday morning. While the bank's decision won't carry the same longer-term weight as the election result, it should have more near-term implications for financial markets and the Canadian dollar.
The country has heard little concrete from the Bank of Canada since its last MPR in mid-July, which coincided with a decision to ease the bank's key rate by one-quarter percentage point to a thin 0.5 per cent, its second rate cut this year. There was a stand-pat rate decision in early September, but outside of that, Governor Stephen Poloz has steered clear of saying anything even hinting at current economic analysis or interest rate policy during the lengthy federal election campaign that began in early August. He has given a smattering of speeches during the campaign that focused on longer-term, big-picture issues for the bank – and unlike his typical public addresses, none was followed by a press conference in which media would have certainly quizzed him on the state of the economy. With the election out of the way, Mr. Poloz's self-imposed muzzle will come off; his press conference following the rate statement and release of the MPR should be enlightening.
Economists and market participants are in broad agreement that the bank won't budge on rates this time around, as it continues to sift through economic data that, while not uniformly positive, still point to improving Canadian growth. Conditions look too good to justify another rate cut, but not nearly good enough to start talking about a rate hike.
The bank will use the MPR to update its now woefully out-of-date estimates for Canadian growth, especially for the nearer term. Thanks to an economic surge in the first half of the summer, economists believe Canadian gross domestic product grew at an annualized pace of about 2.5 per cent in the third quarter, far above the bank's July forecast of 1.5 per cent, shaking off two previous quarters of small contraction. However, there is a concern that given the recent hiccups in U.S. growth and further setbacks in oil prices, the bank's fourth-quarter estimate of 2.5 per cent may be a bit optimistic.
Central-bank watchers will pay special attention to what Mr. Poloz and his colleagues say about a variety of simmering economic risks both overseas and closer to home, given the market turmoil of the summer, the uncertainties surrounding China's growth, and some recent less-than-impressive economic data out of the all-important U.S. market.
"The key focus in the communiqué will be on whether the BoC expresses increased concerns about global growth and more specifically the U.S., given the recent weakness in the data," Nomura Securities strategist Charles St-Arnaud said in a research note. "Moreover, any mention that the BoC sees weaker underlying momentum in the economy would be seen as [an] increase in concerns regarding the strength of the recovery in Canada."