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How ‘aggressive’ will Jim Flaherty be in today’s economic-fiscal update? Add to ...

These are stories Report on Business is following Tuesday, Nov. 12, 2013.

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Flaherty to provide update
Canada’s finance minister is expected to largely stick to the playbook when he releases his economic and fiscal update this afternoon, but economists are watching for how “aggressive” he might be on the numbers.

Jim Flaherty, who boasts one of the world’s few remaining triple-A ratings, will release the fall update in Edmonton.

And, as The Globe and Mail’s Bill Curry reports, he’s expected to show a fatter 2015-16 surplus than previously forecast.

“The big question is not whether – but how much – the government will lower its projected deficit path over the next three years,” said deputy chief economist Derek Burleton of Toronto-Dominion Bank.

“The government is benefiting from a considerably better starting point (about $7-billion lower deficit in fiscal 12-13) than had been projected at the time of last year’s budget,” Mr. Burleton said.

“Some of this improvement in the fiscal position going forward will probably be eroded by a moderate downgrade to the near-term economic outlook relative to last year’s budget assumptions,” he added.

“Corporate profits in particular have been soft, which will impact this year’s bottom line. On the flip side, a downward adjustment to interest rate projections should represent a modest tailwind for the government’s budget balance relative to its last forecast in the spring.”

In his last budget, Mr. Flaherty projected a 2014-15 deficit of $6.6-billion, and a modest surplus of $800-million a year later. But he’s ahead of schedule, putting him in a stronger position today.

“Revenues came in $2-billion ahead of plan while expenditures were $5-billion ahead of plan,” said chief economist Craig Wright of Royal Bank of Canada.

“Given the more favourable starting point we think the plan to balance will be a little more aggressive now, suggesting smaller deficits over the near term and leaving the projected surplus for [fiscal year] 15-16 more convincingly in the black.”

Here’s what some economists expect this afternoon:

“With growth almost bang on the budget assumption this year (1.6 per cent for 2013 real GDP), there’s really little need for any course correction … Perhaps the most notable item will be whether the projection of deficit reduction gets a little more aggressive, given that Ottawa just announced a few weeks back that year’s deficit was materially better than expected in the March 2013 budget (at $18.9-billion versus the expected $25.9-billion. They had also looked for this year’s deficit to drop more than $7-billion (to $18.7-billion), and then disappear two years later. I suspect the forecast will not change significantly, despite last year’s pleasant surprise, and they will still be aiming to balance the books by [fiscal year] 15-16.” Douglas Porter, chief economist, BMO Nesbitt Burns

“It’s been a long time since a mid-year update had much content, so expectations are for a short statement that adjusts current year budget and economic forecasts. The latter draws from the consensus of private sector economists which is easy to find elsewhere. What will be closely watched is the extent to which the outgoing year's better-than-expected deficit carries through into an improvement in the 2013-14 projection. For the bond market, provincial budget balances are now more of the issue, with investors confident that Ottawa is well on track.” Avery Shenfeld, chief economist, CIBC World Markets

“The projections will continue to be based on conservative economic assumptions with explicit produce remaining through the forecast horizon. As a result, any surprises will continue to be good surprises, i.e. smaller-than-expected deficits.” RBC’s Mr. Wright

“The government is likely to maintain its recent approach of building in roughly $3-billion per year in prudence that, if not used, would bring the budget even closer to a surplus as early as 14-15.  Over the past few years, the government's success in beating its deficit targets has been primarily driven by surprises on the spending side of the ledger. The revised targets to be presented [today] will further assume only minimal gains in program spending over the next several years. While there is not likely to be much focus on policy, the government could remind Canadians of some of its prior pledges once the government reaches surplus. This includes a plan to income split." TD's Mr. Burleton

China pushes reform
Don’t try to read too much into today’s announcement from China’s Communist Party because the answer may well be elusive.

The communiqué released after the four-day meeting of the central committee called for economic reform and a "decisive role" for markets: “The core issue is to straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government’s role.”

The party plans to establish a group that will push these efforts, aimed at marked reform by 2020.

“It would be foolish to rush to a snap judgment on whether the Third Plenum was a success given how little was revealed of leadership deliberations and the long period over which reforms will have an effect,” said Mark Williams, the chief Asia economist at Capital Economics in London.

“Relative to expectations, though, our initial sense is that it has fallen some way short,” he added in a research note.

“Some disappointment was probably inevitable given the unrealistic belief in some quarters that it would deliver a detailed policy package. But the purpose of this meeting was to achieve backing for a clear and comprehensive blueprint for reform, what President Xi had referred to as a ‘master plan.’ The Plenum doesn’t seem to have delivered that either.”

The “decisive role” for the markets could mean a lot or a little, Mr. Williams said. Missing from all of this is an “overarching view” of how the various moves fit into the overall puzzle.

“The biggest question that the communiqué throws up is what role will be played by a new group tasked with ‘deepening economic reform,” he said.

“Its creation might signal that the leadership has had to defer discussion of certain areas after failing to reach agreement at the Plenum. But the creation of a small, focused team at the senior party level might also be the best hope for pushing comprehensive reform over the years ahead.”

British inflation eases
Falling inflation is giving Mark Carney and his Bank of England colleagues something to think about.

Britain’s annual inflation rate slipped at its latest reading to 2.2 per cent, the lowest in more than a year and below the 2.5 per cent expected among economists.

“The drop in the cost of living exceeded analysts’ estimates and actually boosted equities,” said market analyst Davic Madden of IG in London.

“It’s clear that the bond-buying scheme by the Bank of England (BoE) is burning the candle at both ends: Output and growth are increasing while inflation is declining, leaving the door open for a longer-than-expected [quantitative easing stimulus] program,” he said in a research note.

“The major risk when operating a stimulus package is that an accelerated inflation rate will outstrip the level of growth, but as this is not an issue for the BoE it’s £375-billion scheme is unlikely to be reduced any time soon.”

OPEC to regain importance next decade
Expanding production of unconventional oil outside OPEC will diminish the importance of Middle East production over the next decade, but the region will reclaim its leverage over oil markets after 2020, the International Energy Agency says in a new report.

The IEA said technology and high oil prices are opening up new sources of crude, but that does not mean the world can expect an abundance of cheap oil, The Globe and Mail's Shawn McCarthy reports.

“Although rising oil output from North America and Brazil reduces the role of OPEC countries in quenching the world's thirst for oil over the next decade, the Middle East - the only large source of low-cost oil - takes back its role as a key source of oil supply growth from the mid-2020s,” the agency said in its annual World Energy Outlook.

The United States is forecast to surpass Saudi Arabia as the world’s leading oil producer by 2016, one year earlier than the IEA’s previous estimates. But by 2020, the light, tight oilfields of North Dakota and Texas will be in decline, and the Middle East will re-assert its dominance over oil markets.

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