CANADA ECONOMICS

BUDGET

The Globe and Mail. 27 Feb 2018. Budget expected to be light on big new spending. Observers also expect fewer big-spending projects as Morneau takes more targeted approach to latest fiscal plan
BILL CURRY, With a report from Gloria Galloway in Ottawa

Finance Minister Bill Morneau has yet to announce a target date for erasing the deficit, even though the Liberal Party’s 2015 election platform promised to keep annual deficits under $10-billion and balance the books by 2019.

OTTAWA - Finance Minister Bill Morneau will release his latest plan for small business tax changes Tuesday in a budget that is expected to be light on big new spending.

After back-to-back budgets that announced billions for infrastructure and social programs over the next decade, the Liberal government is signalling that its third budget will focus on just a few targeted areas.

Government officials say measures to support scientific research and boost the participation of women in the work force will be the two key themes of Tuesday’s budget. But many small-business owners will be watching closely to see how the Finance Minister responds to their concerns over the government’s controversial tax changes.

A government official confirmed to The Globe and Mail on Monday that the budget will include long-awaited details on the government’s tax treatment of passive investments held by incorporated small businesses.

While the official declined to discuss specifics, one tax expert who has met with Finance Canada officials said he expects the government will announce further changes to its approach.

“I believe they’ve listened,” said Len Farber, a former head of Finance Canada’s tax policy branch, who has been among the many critics of Mr. Morneau’s original proposals last summer.

At the time, Mr. Morneau announced a package of proposed changes to the tax rules governing incorporated small businesses. In October, he shelved parts of the plan while other aspects went ahead as of Jan. 1. The last remaining details will be announced in the budget and are related to the taxation of passive investments – such as stocks – that are held inside a corporation.

Mr. Farber said that based on his conversations with officials, he expects the government will simplify its approach. He said a likely option would be to deny the lower small-business tax rate to firms with passive investments that are above a specific threshold. The government has previously indicated that it wants to restrict any changes to companies with more than $1-million in savings.

“I think what they’re going to do is possibly constrain access to the small-business deduction,” he said. “That to me would make sense and that’s what I think a lot of people have been talking to them about. So I expect a bit of a different proposal.”

Mr. Morneau’s pledge to keep the federal debt on a declining path relative to the economy means the government has little new room to spend beyond the small group of priorities that have already been signalled.

Private-sector economists are urging the minister to limit new budget spending so that Ottawa is able to respond if necessary to economic shocks, such as the potential collapse of the North American free-trade agreement.

The government’s fall update projected a $19.9-billion deficit this year. The size of the annual deficit was projected to decline to $12.5-billion by 2022-2023.

Mr. Morneau has yet to announce a target date for erasing the deficit, even though the Liberal Party’s 2015 election platform promised to keep annual deficits under $10-billion and balance the books by 2019.

Randall Bartlett, chief economist with the University of Ottawa’s Institute of Fiscal Studies and Democracy, said he’s skeptical that the Finance Minister will be able to meet his longer-term fiscal targets given that they are based on a sharp change in spending trends.

The government’s fall fiscal update signalled that the growth rate of new direct program spending would be kept to less than 2 per cent for the next four years.

“I’m not expecting any major new spending,” Mr. Bartlett said.

In a sign that any big spending plans will be pushed off until closer to the 2019 election, former Ontario health minister Eric Hoskins, who resigned Monday from the provincial legislature, is expected to be named Tuesday to a new federal panel assigned to design a national pharmacare plan. The panel will have until 2019 to make recommendations.

Meanwhile Jane Philpott, the Minister of Indigenous Services, has promised that the budget will contain the cash needed to put the government in compliance with a 2016 ruling by the Canadian Human Rights Tribunal that said social services for children on reserves had to be funded at levels similar to those provided to other Canadian kids.

Also, members of the Green Budget Coalition, a group of 19 of Canada’s top environmental organizations, have been told to expect good news in the budget. The coalition has asked for a historic expansion of Canada’s protected land and marine areas to be financed with an investment of $1.4-billion over three years.

The money would go toward the development of national parks and protected areas being created by Indigenous groups, provinces, territories, municipalities and private interests.

The Globe and Mail. 27 Feb 2018. ARTICLE. With this budget, Morneau’s political education to be put to the test
CAMPBELL CLARK, Columnist

OTTAWA - Behind closed doors, Bill Morneau comes off differently. He’s a little tougher, clearer on his goals. In public, the Finance Minister looks less assertive – and sometimes like a deer caught in the camera lights.

The difference, some people who know him say, is excessive, fearful caution. The former chief executive wanted to steer fiscal policy but also steer clear of embarrassing the government. Then he became the government’s chief embarrassment of 2017.

And ever since Mr. Morneau’s small-business tax reforms and ethics controversies put him through the political meat grinder last year, he has gone through a political education. The outcome, according to some close to him, is that in his third year as Finance Minister, he has accepted that he’s a politician. That means doing politics: being prepared for attacks on his policies, being on camera and selling his initiatives to the public – and even to MPs in his own caucus.

The first real test starts with his third budget on Tuesday – a fiscal blueprint that by all accounts will be very political. All budgets are political, of course, but some are about putting a political spin on economic plans. Think of Liberal Paul Martin’s 1995 deficit slasher or Conservative Jim Flaherty’s $56-billion deficit amid the financial crisis in 2009. Mr. Morneau’s first budget made an economic and political statement by running bigger-than-expected deficits to fund infrastructure and social spending.

But this year’s budget won’t be about economic shifts – such as competing with U.S. tax cuts or trimming the deficit in case of a recession or the failure of NAFTA talks. This will be a budget driven by a political narrative, a gender-sensitive budget expected to have a variety of relatively small-dollar measures threaded throughout. That’s an important narrative for Justin Trudeau’s Liberal government, which wants to fuel its lead with female voters by sending a message that it’s trying to close the gender gap in the work force. Even if this budget doesn’t come with pre-election spending, it is already – 20 months before voting day – a pre-election budget. It’s not Mr. Morneau’s job to call the big political plays. They come from the Prime Minister’s Office, notably Mr. Trudeau’s principal secretary, Gerald Butts, and chief of staff, Katie Telford. (The secondary budget theme of supporting science and research comes, however, from Mr. Morneau.) The Finance Minister’s job is to sell the politics in economics form – in this case, to make the case that the measures will work and that closing the gender gap leads to economic growth.

In fact, Mr. Morneau’s job isn’t just putting a political spin on finance; it’s putting an economics spin on Liberal politics. Mr. Trudeau needs Mr. Morneau, or someone like him, to do it.

That’s counterintuitive. Mr. Morneau walked into a mess last year with his small-business tax reforms – and walked out with his reputation weakened.

His political education included admitting he knew that wealthy Canadians would be upset by his tax changes; that he should have been better prepared for the uproar and the down-and-dirty fight that ensued; that he can’t just be the minister setting policy – he is the public figure who must do the politics.

The tax changes morphed into personal politics when it emerged that Mr. Morneau had not sold his shares in his former firm, Morneau Sheppell. The opposition levelled charges of insider trading and conflict of interest, which he fumbled. He backed off many of his reforms, promised to donate share gains to charity and is still waiting for Ethics Commissioner Mario Dion to complete a second report on conflict allegations. Politics might as well have hit Mr. Morneau on the head with a hammer in 2017.

Still, Mr. Trudeau needs a figure like Mr. Morneau. Inside government, he gets credit for his economic acumen and for things such as making deals with provinces on health care and expanding the Canada Pension Plan.

This is a Liberal cabinet with liberal spending instincts. And it doesn’t have as many businessoriented blue Liberals as the cabinets of Jean Chrétien and Paul Martin. Mr. Morneau is virtually the only voice for (limited) spending restraint, apart from a few sympathizers such as Treasury Board Secretary Scott Brison. And the Liberals do best politically when there is a prominent voice of restraint to reassure the public. Mr. Morneau’s budget won’t slash the deficit, but the test of his influence will be its constraints. The Liberals have to hope that his political education will rebuild his reputation, because they need someone to put an economic spin on their politics.

THE GLOBE AND MAIL. FEBRUARY 26, 2018. FEDERAL BUDGET 2018. Six things to watch in the federal budget
MATT LUNDY  AND TOM CARDOSO

The federal Liberals will deliver the third budget of their mandate on Tuesday against a backdrop that has shifted dramatically in a matter of months.

On one hand, the Canadian economy beat expectations with stellar growth rates, and employers went on a hiring binge, particularly for full-time workers.

On the other hand, Canada's competitive position took a substantial hit.

For starters, the United States has slashed its corporate tax rate – and in the process, wiped out Canada's relative advantage. The U.S. has likewise imposed duties on Canadian lumber and could do the same with steel and aluminum imports. Moreover, the renegotiation of the North American free-trade agreement is grinding along with no end in sight.

Still, "governments need to consider the stage of the business cycle," Toronto Dominion-Bank economists said in a recent report. "Injecting significant fiscal stimulus in Canada at this point could lead to higher interest rates and raise pressure on highly indebted households."

With that in mind, here are six things to watch on Tuesday.

Budget balance

Federal budget balances, by fiscal year

In billions of dollars

$5

Liberal Party

platform, 2015

Projections

0

-5

Fall 2017 update

(current proj.)

-10

Budget

2016

-15

Budget

2017

-20

-25

-30

-35

2014

FY 2010

2012

2016

2018

2020

2022

In 2015, the Liberals campaigned on a multi-year spending program aimed at jump-starting a sluggish economy, promising a balanced budget by 2019. Those rosy projections were quickly abandoned in favour of deeper spending. Meanwhile, in an attempt to move away from the usual surplus-or-deficit debate, Mr. Morneau has focused on reducing the federal debt-to-GDP ratio instead, which hovers at roughly 31.2 per cent, according to RBC Economics.

However, with Canada posting some of the strongest GDP growth rates in years, some economists, including former parliamentary budget officer Kevin Page, would like to see a concrete deficit-reduction plan. The fall fiscal update acknowledged the economy's stronger position, and projected the deficit would be $12.5-billion by 2022, the closest to a balanced budget since the Liberals took over. Expect the looming federal election in 2019 to be on Mr. Morneau's mind on Tuesday when he announces the government's latest deficit projections.

Gender equality



Ottawa is set to make gender equality a major theme of this year's budget. The document is expected to include funding for pay-equity legislation for employees in the federal government and federally regulated sectors, a source told The Globe, along with measures to encourage women's participation in the labour force.

More than 82 per cent of Canadian women between the ages of 25 and 54 were either working or looking for employment in January – a much higher participation rate than in decades past, but nearly nine percentage points lower than the respective men's rate. Closing the gap could boost gross domestic product by 4 per cent, Royal Bank of Canada economist Laura Cooper said in a report last year.

Parental leave



Expanded measures on parental leave could be on the way. At a forum in India, Prime Minister Justin Trudeau said his government was looking at "leave that can only be taken by the second parent, in most cases the father." A similar model is used in Quebec, allowing fathers to take up to five weeks of funded leave that covers up to 70 per cent of their income. Since the policy was implemented in 2006, the proportion of new fathers in Quebec who take paid leave has risen substantially.

Innovation

Spending on R&D as a percentage of GDP, five-year averages

4.0%

South

Korea

Japan

3.5

3.0

Germany

2.5

U.S.

Australia

2000-04

France

2.0

China

2010-14

Canada

Britain

1.5

1.0

Italy

THE GLOBE AND MAIL, SOURCE: CANADA’S FUNDAMENTAL SCIENCE REVIEW

Here's all you need to know: The word "innovation" appeared 364 times in last year's budget. To stamp out any further doubt, the federal government made it clear last week to expect more funding for science and innovation beyond the initiatives the government already has in place. Budget 2017 acknowledged Canada's gap in skills training and announced the creation of the "superclusters" initiative, innovation hubs designed to boost Canada's GDP and create tens of thousands of jobs. The final five superclusters were announced earlier this month.

So, what's next? The final report for Canada's Fundamental Science Review, published last year, noted that Canadian spending on research and development was not only falling behind that of other countries (including China, Australia, France, the U.S., Japan, South Korea, and Germany), it was also decreasing compared to a decade ago. Expect the Liberals to make further investments in an attempt to reverse the trend.

Small business tax reform



The budget will feature Ottawa's final plans on how it taxes passive investments inside private corporations. The Liberals came under fire last summer for a series of proposed changes on the taxation of incorporated small businesses, including its aim to remove preferential tax rates on investments made inside private corporations.

Following the uproar, the proposal was revised to apply only to passive income above $50,000. The revised plan could eventually bring in up to $6-billion a year in revenue, and affects an estimated 2.5 per cent of incorporated small businesses, according to a Parliamentary Budget Officer report. Still, the government has not released draft legislation of its passive income rules, so the budget will be keenly watched.



The budget will include short-term financial help for embattled media outlets, and Ottawa will explore the possibility of giving non-profit status to news organizations, federal sources have told The Globe. Separately, Heritage Minister Mélanie Joly has said the Canadian Periodical Fund, which provides $75-million in annual assistance to magazines and non-daily newspapers, is under review. News Media Canada, an association that represents more than 800 news outlets across the country, has proposed overhauling the fund and providing the industry with $350-million in annual assistance.

What the economists say

The Globe asked some economists what they'd like to see addressed in the budget and why. Here's what they said:

• Avery Shenfeld, chief economist at CIBC: The Finance Minister has made it clear that Ottawa isn't going to rush out with a response to U.S. corporate tax cuts, but I'd like to see the budget set in motion a review of Canada's tax and regulatory competitiveness, for action in the next budget. This isn't the stage of the business cycle where we are looking for a major new dose of fiscal stimulus, so we should make progress on weaning deficits down gradually, and find any money for new initiatives by paring back on less successful programs.
• Douglas Porter, chief economist at the Bank of Montreal: Canadian fiscal policy makers find themselves in an awkward situation. On the one side, the arguments in favour of fiscal stimulus have all fallen by the wayside – growth and jobs rebounded forcefully last year, the unemployment rate has tumbled to nearly a four-decade low, and interest rates are no longer at rock-bottom levels. Normally, this backdrop would suggest that this budget should mildly restrain spending, cut the deficit and marshal resources for the next bout of heavy weather for the economy down the line, as well as to prepare for long-term demographic challenges. However, the sweeping tax changes in the U.S., as well as the overhang of uncertainty surrounding NAFTA, are a clear and present risk to the medium-term business investment outlook, and thus to the long-term economic outlook. At the very least, this budget should set the tone of recognizing these challenges, and look for ways and measures to offset or mitigate these risks to the capital spending climate. In a nutshell, Canada's competitive standing is under serious strain – from a variety of angles – and addressing that pressure should be priority number one in this budget. 
• Beata Caranci, chief economist at TD Bank: The government shouldn't take for granted that Canada can easily weather greater competitive challenges posed by U.S. tax cuts, ongoing NAFTA uncertainties and the general thickening of the border. Combined, these can delay or deter new investment, both domestically and from foreign firms looking to invest in Canada. The first order of the day should be to do no harm. Avoid actions that worsen Canadian competitiveness, particularly in terms of attracting new investment and talent. For example, raising taxes on stock options would hurt the competitiveness of innovative start-ups by making it harder to attract skilled talent. Do-no-harm also applies to fiscal finances. Avoid taking the U.S. lead in running large deficits. The go-forward tactic should be a two-pronged tax response that's as revenue neutral as is possible. For instance, parallel the U.S. move to allow temporary, full expensing of capital equipment with offsets in the elimination of inefficient boutique tax credits and tax expenditures that provide little economic bang for the buck. The second step to consider is bolder reforms to the tax system, ideally reducing the reliance on taxes that are most economically harmful (i.e., income taxes) and increasing levies that are less damaging (i.e., sales taxes). This is often a harder political pill to swallow, but can pay dividends. A final competitiveness consideration is to incent private sector training. Current support programs are tilted towards training/upskilling within small businesses and the manufacturing sector. Assistance needs to be broadly disseminated across industries and firm sizes. The post-digital economy knows no boundaries.

NAFTA

BLOOMBERG. 27 February 2018. Rising Rates and Trump’s Threats Tie Trudeau’s Hands in Budget
By Josh Wingrove

• Canadian government to lay out its 2018 fiscal plan Tuesday
• Few new measures expected amid Nafta talks, U.S. tax changes

VIDEO: The Three Sticking Points in Nafta Discussions. Intervew with Dr Monica de Bolle, Senior Fellow at Peterson Institute for International Economics. https://www.bloomberg.com/news/videos/2018-02-26/the-3-sticking-points-in-nafta-discussions-video

Justin Trudeau, pinched for new cash and facing calls from businesses to tackle Canada’s deteriorating competitiveness, is turning his focus to lower-cost political priorities such as gender equality and science in his government’s third budget.

Trudeau’s finance chief Bill Morneau releases a finance plan Tuesday around 4 p.m. in Ottawa that is expected to hold off from major new funding initiatives and deal largely with gender policy, such as boosting women’s workforce participation rates. Morneau has signed he’ll keep to a plan of slow deficit reduction while lowering the ratio of federal debt to gross domestic product.

The plan comes amid calls to cut corporate taxes as businesses worry about the risks posed by U.S. President Donald Trump’s policies, at a time when the country’s growth is slowing, pinched by the uncertainty associated with ongoing Nafta talks and a wider discount for Alberta oil. Canada is losing a competitive edge, partly due to U.S. tax reform and the threat Trump could withdraw from the North American Free Trade Agreement, business groups warn. Morneau is under pressure to act, but all signs are that he’ll wait.

“From a macroeconomic perspective, I don’t expect a whole lot,” said Jean-Francois Perrault, chief economist at Bank of Nova Scotia in Toronto and a former top finance department official. He called on Morneau to keep his “powder dry” to preserve leeway to respond to crises down the road, and to use this budget to signal “he’s watching the situation carefully and is ready to respond if he needs to.”

The most recent federal figures, released last fall, projected C$86.5 billion ($68 billion) in deficits over five years, beginning with the fiscal year that ends March 31, through 2021-22. Morneau projected the debt-to-GDP ratio would fall to 29.1 percent from 30.5 percent over that period.

However, there are signs Morneau has less wiggle room than before. While his deficit is modest by international standards, it’s seen as a political liability at home. His government has already hiked its forecast program expenses for the next three fiscal years.

Next year’s budget is more politically significant, with an election due that fall. Trudeau will also create a commission to study options for the creation of a national plan to cover pharmaceutical costs, according to reports by the Canadian Broadcasting Corp., a potentially big-ticket item that would further strain federal spending.

Meanwhile, rising interest rates and mounting debt have ended a run of windfalls from declining debt service costs, that Morneau and his predecessors have used to cut taxes and boost spending.

Trump Effect

Morneau is delivering his budget with the latest round of Nafta talks underway in Mexico City. There have been widespread calls from the private sector for Canada to move to increase business competitiveness.

“I would like to see the competitiveness of Canada remain at the forefront,” Royal Bank of Canada Chief Financial Officer Rod Bolger said in a telephone interview last week. “I don’t think tax reform is going to be in there,” he said, adding the federal government should focus on creating a strong economy.

The Business Council of Canada, representing chief executives of many of the country’s biggest firms, warned “Canada must respond now” by, for example, cutting business taxes, allowing business investments to be more easily written off or punting planned changes to taxation of investments held in private corporations.

The Canadian Manufacturers and Exporters industry group also called for a tax cut and a business investment tax credit. “Similar to the U.S., we believe that Canada and its provinces should be looking at a range of tax reforms to boost investment and growth,” Dennis Darby, CME president and chief executive officer, said in a letter on behalf of several manufacturing groups.

Tom Caldwell, chairman of Caldwell Financial Ltd. and CEO of Urbana Corp., said he’d rather see Morneau balance the budget than cut taxes to compete with the U.S. “Less is more,” he said. “As far as governments go my expectations are always fairly low and I’m rarely disappointed.” Morneau said this month he’d “carefully consider” U.S. tax changes, while saying he thinks Canada’s tax system is already competitive.

Infrastructure Gridlock

The budget will be a key mile-marker for one of the Trudeau government’s hallmark pledges to hike infrastructure spending in a bid to stoke growth, something Bank of Canada Governor Stephen Poloz has said the economy can look forward to.


In late 2016, Morneau announced C$81 billion in new infrastructure funding, bringing the federal government total to C$186.7 billion over 12 years, roughly doubling its spending rate on projects such as roads and transit. There are some signs the government is struggling to get all the money out the door, forcing it to be potentially bumped -- or “reprofiled,” in government slang -- into different years.

“Ottawa clearly has a kind of structural surplus of infrastructure dollars that will continue to go perpetually unspent,” said Sean Speer, a senior fellow for fiscal policy at the Macdonald-Laurier Institute and former economic adviser to Trudeau’s predecessor, Stephen Harper. “I honestly do think they’re in a world of perpetual reprofile.”

A Morneau spokeswoman declined to comment on infrastructure spending. Brook Simpson, a spokesman for Infrastructure Minister Amarjeet Sohi, said federal money “is a lagging indicator to project activity,” as money is often only released after a project is done. Any money that doesn’t flow is reprofiled to another year and still available, he said.

— With assistance by Kristine Owram, Doug Alexander, and Erik Hertzberg

BLOOMBERG. 26 February 2018. U.S. Auto Negotiator Is Called Back From Nafta Talks, Sources Say
By Toluse Olorunnipa and Jennifer Jacobs

• Official said to return to Washington for industry discussions
• Rules of origin negotiations said to be postponed on departure

The U.S. Trade Representative’s office has called back its chief negotiator for Nafta’s car-related issues to Washington from ongoing talks in Mexico City to meet with American industry representatives, according to three people familiar with the process.

Further Nafta negotiations on rules of origin for cars, which started on Sunday, have been postponed in the absence of Jason Bernstein, the top U.S. negotiator on the topic, according to two people familiar with the move, who asked not to be identified because talks are being held behind close doors.

Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, said by phone from Mexico City that Bernstein had returned to Washington for a series of meetings on rules of origin, with the U.S. automobile and other industries. The USTR declined to comment.

Nantais said he expects U.S. carmakers “to make it very clear as to the importance of their operations to American jobs,” and that a modernized Nafta is their preference over U.S. withdrawal from the pact. “These meetings should not come at a surprise when there’s so much at stake,” he said.

Bernstein could still return to Mexico City later this week, Nantais said. The two people familiar with negotiations said talks on the rules of origin, which govern how much regional content a car must have to enjoy Nafta’s duty-free benefits, could resume as soon as this week. The current round is due to run until March 5.

Inside U.S. Trade, a news service, previously reported the negotiator was called back to Washington for meetings.

‘Good Thing’

In a bid to revive U.S. factories, the White House has proposed raising the regional automotive rules of origin for passenger cars to 85 percent from 62.5 percent and add a U.S.-specific requirement of 50 percent.

Automakers warn the proposals would upend supply chains that rely heavily on Nafta. Canada at the last negotiating round in Montreal proposed its own ideas on how to calculate the value of regional content in vehicles, including giving more credit for driverless and electric cars, plus research and development work. U.S. Trade Representative Robert Lighthizer called the Canadian proposal on cars “vague,” and argued it would reduce the share of a vehicle made within the region.

Flavio Volpe, president of the Canadian Automotive Parts Manufacturers’ Association, which opposes the U.S. proposal on rules on origin, welcomed the U.S. government doing more industry consultations. “Finally,” Volpe said. “I couldn’t think of a better reason” for Bernstein to return to Washington.

While Mexico’s automobile association, known as AMIA, has said it opposes a higher content rule for cars, Economy Minister Ildefonso Guajardo has signaled that the rules probably will need to be strengthened to reach a deal.

The U.S., Mexican and Canadian governments began renegotiating the North American Free Trade Agreement in August at the initiative of President Donald Trump, who has promised to negotiate a better deal for America or withdraw.

INTERNATIONAL TRADE

Canadian International Trade Tribunal. February 26, 2018. Tribunal Issues Determination of Reasonable Indication of Injury — Dry Wheat Pasta from Turkey

Ottawa, Ontario — The Canadian International Trade Tribunal (the Tribunal) today determined that there is a reasonable indication that the dumping and subsidizing of dry wheat pasta from the Republic of Turkey have caused injury or are threatening to cause injury to the domestic industry.

The Tribunal’s inquiry was conducted pursuant to the Special Import Measures Act as a result of the initiation of dumping and subsidizing investigations by the Canada Border Services Agency (CBSA). The CBSA will continue its investigations and, by March 28, 2018, will issue preliminary determinations.

The Tribunal is an independent quasi-judicial body that reports to Parliament through the Minister of Finance. It hears cases on dumped and subsidized imports, safeguard complaints, complaints about federal government procurement and appeals of customs and excise tax rulings. When requested by the federal government, the Tribunal also provides advice on other economic, trade and tariff matters.

FULL DOCUMENT: http://www.citt-tcce.gc.ca/en/whats-new

The Globe and Mail. 27 Feb 2018. Rising American retail spending may have a larger effect on Canadian exports than a weaker loonie. U.S. growth, not the loonie, will drive Canadian exports. Currency is a poor indicator, which is good news for the economy
SCOTT BARLOW, Columnist

Investors tend to point at the loonie to explain changes in Canadian exports to the United States, but history shows the currency has little effect on crossborder economic activity. Export growth is far more dependent on Americans’ consumer spending and this is good news in light of a strengthening U.S. economy and falling greenback.

The top chart compares the value of the loonie with Canadian export levels. Note that the data are from the U.S. perspective (a rising blue line indicates a falling Canadian dollar) to keep the numbers consistent through our two charts.

If currency value were the primary determinant of domestic exports southwards, the lines on the chart would more in tandem, with U.S. imports from Canada rising along with the U.S. dollar. Since 1994, however, it was more common for the two data series to move in opposite directions.

Commodity exports are a big issue that prevent the “weaker loonie/higher exports” theory from happening in the real world. Higher oil prices, for instance, increase the U.S. dollar value of their imports while simultaneously pushing the loonie higher.

The case remains that currency is a poor indicator of the contribution of exports to domestic economic growth.

The lower chart shows the relationship between U.S. consumption growth and Canadian southward exports. The U.S. Bureau of Economic Analysis’s personal consumption expenditure is used to measure consumer spending. The brown line, showing the growth and decline in domestic exports, moves more closely with U.S. consumption levels than with currency values.

This strongly implies that rising American retail spending, not a weaker loonie, has the larger effect.



U.S. consumer spending is only improving gradually, but the stubbornly weak U.S. dollar means the two charts are good news for the Canadian economy. The potential for American fiscal stimulus provides a bright forecast for U.S. consumption. And, if currency were the main driver of Canadian exports, we’d expect the weaker greenback to crimp trade, but the top chart suggests this isn’t the case.

CANADA - INDIA

THE GLOBE AND MAIL. THE CANADIAN PRESS. FEBRUARY 27, 2018. Trudeau backs official who said Indian government factions sabotaged trip

OTTAWA - Justin Trudeau is standing by a senior government official who suggested factions within the Indian government were involved in sabotaging the prime minister's visit to India last week.

During his first question period since arriving back in Canada, opposition MPs are grilling Trudeau about invitations issued to Jaspal Atwal – a B.C. Sikh convicted of attempting to assassinate an Indian cabinet minister in 1986 – to attend two events with the prime minister in India.

In a background briefing arranged by the Prime Minister's Office, a government official suggested that Atwal's presence was arranged by factions within the Indian government who want to prevent Prime Minister Narendra Modi from getting too cosy with a foreign government they believe is not committed to a united India.

Conservatives are identifying the official as Trudeau's national security adviser, Daniel Jean, and they're pressing Trudeau to say whether he agrees with Jean's "conspiracy theory."

Trudeau is defending the official as a professional, non-partisan public servant who provides quality advice.

He says when a top diplomat and security official says something "it's because they know it to be true."

________________

LGCJ.: