Polling continues to point to the most likely outcome in Monday’s Canadian federal election being either a Conservative or Liberal minority government (almost 90% odds for one or the other according to the CBC’s poll tracker) with the suddenly resurgent NDP – or potentially even Bloc Québécois – acting as the swing vote in Parliament. That raises questions about how much a minority government might be able to accomplish, and how long it might last. None of the major parties, though, have campaigned on aggressively trimming the federal budget deficit in the near term. From a purely Canadian economic growth perspective, the risks are probably tilted to a slightly larger support to near-term growth coming from the government sector.
The Canadian election has had its own share of drama/controversy but events have still to an extent been overshadowed by developments abroad. In the UK, Prime Minister Johnson appears to have made some (unexpected) progress towards a new deal with the European Union ahead of the October 31st Brexit date, though it isn’t clear the agreement will get past UK lawmakers. The 2020 election cycle in the US is already heating up, as are presidential impeachment hearings in Congress. US-China trade-tensions eased a touch over the last week with the US delaying a 5-percentage-point tariff hike on roughly US$250 billion worth of imports previously planned for October 15th. Recent development have been positive, but existing tariffs remain in place, and we have seen the tone of trade negotiations ebb and flow before. The Trump administration’s penchant for surprise unilateral trade-policy changes means little in the way of reduced uncertainty for externally exposed businesses.
Beyond the political headlines, the Bank of Canada’s Fall Business Outlook Survey will provide a key update on how Canadian businesses are faring against that uncertain global backdrop. US-China trade tensions have still ratcheted up relative to when the last survey was conducted in May, and that will likely continue to generate concern for businesses with close ties to the US industrial sector. We would certainly not be surprised to see more cracks emerge in Canadian business investment intentions after surprisingly resilient readings over the first half of the year. Still, the Canadian manufacturing sector has been sluggish, but relatively resilient to-date. And the 70% of Canada’s economy accounted for by service-sector industries is humming along. Job growth has been running at almost 40k per month (!) over the last year to September. Stronger auto sales in Q3 bode well for next week’s Canadian August retail sales report. The unemployment rate has been sitting around cycle-lows and wage growth has strengthened. Indeed, the BOS survey will likely continue to highlight labour shortages and capacity pressures as impediments to growth – and those will remain even without international trade tensions. The economic outlook continues to depend, in our view, on the extent that service-sector growth can continue to offset a soggy backdrop for industries more directly exposed to the external growth backdrop, such as manufacturing.