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Making Canada’s economy great again won’t be easy under Trump

By Greg Quinn Bloomberg

The biggest risk to Canada’s economic outlook is likely the U.S. president-elect.

Economists, and policy makers, are predicting Canada’s economy will finally emerge from two years of oil-shock pain to return to potential this year. Yet, the rise of Donald Trump to power and the threat of protectionism is keeping people from getting too optimistic.

Now the Trump threat has immediate implications for Bank of Canada Governor Stephen Poloz, who is due to publish his latest quarterly forecasts next week, and Finance Minister Bill Morneau, who is weeks away from delivering the country’s budget.

“You can’t plug Donald Trump into your forecasts, but you can plug in a bunch of things as risks,” said Chris Ragan, associate economics professor at McGill University in Montreal and former adviser to the Bank of Canada and the finance department. “What happens if he puts tariffs in imported goods? What happens if he cuts corporate taxes? Another one is what happens if he massively spends on infrastructure.”

Indeed, not all the risks from the incoming U.S. administration are to the downside. Faster growth from tax cuts and infrastructure projects would typically boost Canada’s economy, and Trump is open to approving the Keystone XL pipeline. The president-elect has also focused most of his calls for trade renegotiation on Mexico and China, not Canada.

Not so fast

Still, any protectionism jeopardizes the free flow of $541 billion worth of annual trade between the two countries. The Trump team’s proposal to impose a 10 percent tax on goods crossing the American border would knock 9 percent off the value of Canada’s exports to that country, according to estimates from National Bank Financial.

Border taxes would hurt both nations, says Linda Hasenfratz, chief executive officer of Guelph, Ontario-based auto-parts maker Linamar Corp. “We are trying to be globally competitive” in North America against overseas rivals, she said Wednesday on Bloomberg TV Canada. The industry is “intertwined” with “parts going back across the border multiple times.”

The threat of new trade impediments comes just as exports are finally picking up. Canada reported its first trade surplus since 2014 last week. An unexpectedly strong jobs report also added to the sense the economy was turning the corner. That’s reflected in the currency, the third-best performing major this year. Swaps traders have all but priced out the chance of future rate cuts.

Morneau will be briefed Friday by private sector economists in his hometown of Toronto ahead of his budget. Poloz takes final briefings in Ottawa before his interest rate decision Wednesday. Economists say Trump will be top of the governor’s mind.

“The issue is more about all the question marks regarding the details and to what extent Canada might be hit by a rise in protectionism,” Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities in Montreal and a former central bank researcher, said by phone from Montreal. “They will put a lot of emphasis on the risks to the outlook” at the rate decision, he said.

For now, “downbeat is the right place to be,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. “Probably the worst is behind us,” from the oil shock, he said. “The recovery from that however is going slower than I think anyone at the bank would like to see.”

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