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business briefing

Market impact

Analysts believe next week’s Canadian election will have little impact on the markets, but one global bank thinks a Liberal minority government would be best.

“We believe that the most positive outcome would be a minority Liberal government, as it is the most likely to yield a stable government,” Charles St-Arnaud and Sam Bonney of the Nomura economics group told clients in a recent report.

“The Liberals share the same views as the NDP on many issues, meaning that the NDP would likely vote with the Liberals on many laws,” they added.

“Nevertheless, the longevity of the government would depend on the willingness of the NDP to call a new election by voting with the opposition and toppling the government. In addition, the increased likelihood of more fiscal support for the economy would reduce the need for further rate cuts by the [Bank of Canada] and could support [the Canadian dollar].”

The Bank of Canada has already cut interest rates twice this year, and few analysts see another cut in the cards.

Which puts the focus on fiscal policy. The Conservatives and New Democratic Party plan balanced budgets, while the Liberals project a few years of deficit.

The report took clients through the various polls, which suggest a minority government scenario. That’s why Nomura outlined potential slim victories rather than a majority, though, as we’ve seen, the polls can be wrong.

And when the bank referred to markets, it was primarily talking about the Canadian dollar.

Here’s what Nomura said of the Tories: “The Conservatives’ strong commitment to a balanced budget has limited their willingness to offer fiscal stimulus if the Canadian economy worsens. Moreover, as the impact of the big decline in the terms-of-trade continues to make its way through the economy, with an unambiguously negative impact, such a focus on fiscal rectitude and constraint on spending likely means that the responsibility for stimulating the economy falls to the Bank of Canada through rate cuts, with all the increased imbalances that come with lower rates.”

Of the Liberals and infrastructure spending plan: “The amount of stimulus remains small, with $60-billion over 10 years representing about 3 per cent of the federal government budget or 0.5 of a percentage point of GDP. The other issue is that it is always easier to spend than to restrain spending and it needs to be clear that the deficit resulting from the increased spending will be reversed. As such, infrastructure spending is viewed as raising future revenues, but for that it is important that the right projects are selected.”

Of the NDP and plans to raise corporate tax rates: “The NDP seems to be trying to juggle 1) pleasing their supporter base, which tends to be more left wing that that of the Liberals, and 2) showing that they can achieve that while still being fiscally responsible ... Increased spending could be beneficial to the economy, especially if well targeted. However, the increase in corporate tax could put Canadian corporations at a disadvantage against other jurisdictions. However, with some of the lowest corporate tax rates in the OECD, the impact could be small.”

As for potential outcomes other than a Liberal minority, here’s what Nomura said of the Tories:

“A minority Conservative government would be a slight negative for financial markets given the uncertainty that it would create, despite its generally market-friendly stance. The uncertainty would mainly be the result of the high likelihood that the Liberals and NDP would form a coalition and topple the government. This scenario may take some weeks to unfold and it would be some time before stability returned.”

And here’s what the bank said of the New Democrats:

“A minority NDP would also be a slight negative, but mainly because market participants would likely be wary of an untested party coming to power, especially as its politics are less market-friendly and that its support is mainly from the left. But these worries are likely to be short-lived if the party keeps some of its balanced budget stances.”

But at the end of the day, the analysts said, any impact would probably not last long.

Factory sales dip

Canada’s manufacturing sector suffered its first dip in four months in August, as sales slipped 0.2 per cent.

Sales were down in eight of 21 industries measured, Statistics Canada said today.

Unfilled orders inched up 0.2 per cent, and new orders fell 5.6 per cent.

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