Canada Needs Fiscal Stimulus to Stoke Growth, Economists Say

Canada’s economy needs fiscal stimulus to boost growth and become more competitive, economists at a conference in New York said as the country’s election heads into its final stretch.

“Canada has to embark at the federal level on far more aggressive strategies beyond just having corporate tax rates edge lower, towards creating incentives to really build the infrastructure,” David Rosenberg, chief economist at Gluskin Sheff + Associates, said Wednesday at Bloomberg LIVE’s Canadian fixed income conference.

Canadians vote on Oct. 19 with polls showing a tight race between the incumbent Conservative Party led by Prime Minister Stephen Harper, the Liberal Party and the New Democratic Party.

The Liberals, led by Justin Trudeau, have proposed raising taxes on higher-income earners and cuts for the middle class as well as deficit spending on infrastructure and other measures to boost growth. The NDP favors balanced budgets and is the only major party calling for a corporate tax increase. The incumbent Conservatives are pledging to stay the course, with balanced budgets and no tax increases.

Canadian gross domestic product is forecast to expand 1.1 percent this year, the weakest since a contraction in 2009, according to estimates compiled by Bloomberg.

“The government’s now poised to run surpluses two years in a row at a time when the economy is still clearly under-performing expectations,” said Rosenberg, whose firm managed C$8.6 billion ($6.4 billion) as of June 30. “And that’s the problem.”

Challenges Ahead

Fiscal stimulus is “appropriate at this junction,” said Warren Lovely, a managing director at National Bank Financial.“What we continue to possess in spades in Canada is a fiscal advantage.”

Canada’s economy will see a pick up in the second half of the year after contracting in the first two quarters, but faces several long-term challenges including weak competitiveness as economies like Mexico and China come on strong, according to Chen Hoon Lim, mission chief for Canada at the International Monetary Fund.

Lim also said the next federal government will need to address “vulnerabilities” in the country’s housing sector, and may require more regulations to reduce risk from an overheated market, according an official.

“There are some vulnerabilities in the housing sector, we saw household debt has climbed up to a historical level,” Lim said at the conference. “One of the things the new government will have to think about is: We need to support growth, but at the same time we need to address the vulnerabilities in the housing sector.”

Mortgage Insurance

The IMF said in January that “additional macro-prudential policy action may be needed if household balance sheet and housing market vulnerabilities resume rising, in particular tighter standards for uninsured mortgages.”

Canada’s Finance Minister Joe Oliver has been more hands-off in intervening in the country’s housing market than his predecessor Jim Flaherty, who reduced amortization periods and took other steps to curb mortgage borrowing earlier in the decade. Still, Canada Mortgage & Housing Corp., whose mortgages are fully backed by the federal government, in April raised mortgage insurance fees for borrowers with less than a 10 percent down payment.

“If risks continue to increase, we would recommend further macro-prudential measures,” Lim said.

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