Three Reasons to Keep a Close Eye on Canada's Federal Election

From market risk to climate change.

Actual Canadian politicians.

Photographer: Ben Nelms/Bloomberg

As we round the final corner, the Canadian federal election is still very much up for grabs.

Polling aggregator ThreeHundredEight has the Liberal Party with 35.1 percent support nationwide with less than a week to go, with the ruling Conservative Party close behind at 31 percent and the New Democratic Party (NDP) polling at 23.3 percent.

It’s uncertain which party will win a plurality of seats in the House of Commons–but very likely that the same group will not be the one holding the balance of power. With a minority government the most likely outcome, that means the possible policy mix implemented after the dust settles spans everything that’s been discussed by the three major parties–and possibly some measures that haven’t yet been brought up in public.

And the effects of Canada’s policy mix are likely to extend far outside its border, having an impact on the U.S. economy, offering perspective on the international politics of climate change, and potentially changing the dynamics for foreign investors.

Here are three good reasons not to gloss over Canadian headlines in the runup to Monday's election.

1. Into the unknown?

In early August, when the NDP was at the top of national public opinion polls, a Toronto-based broker hopped on a flight to London—his third of the year—to speak with clients worried about a possible shift in Canada's political landscape. No amount of reassurance proved sufficient: Several of his clients cut their Canadian holdings the next week.

This anecdote is indicative of a larger theme of bearish sentiment on Canada—partially attributable to the collapse in oil prices but also to uncertainty surrounding the federal election.

The NDP is an unknown quantity that has never formed a government at the federal level. But what investors do know, they don't like—namely, the NDP's plan to raise the corporate tax rate.

Recent history shows the degree to which changes in government can cause massive headaches in the market. The day after Alberta's provincial election, Canadian energy stocks tumbled 5 percent as investors digested the implications of a majority NDP government, even as oil was flat.


But Brian Belski, chief investment strategist at the Bank of Montreal, believes the Canada angst is overdone. "The 'Eeyore Complex' is alive and well in Canada," he wrote in a recent research note. "We believe much of the bad news is now priced in and Canada should become increasingly correlated to a strengthening U.S. economy."

Clearly, there is no developed country better positioned to capitalize on a buoyant U.S. consumer than Canada.

2. Pain cuts both ways

When the Great White North catches pneumonia, the U.S. comes down with toothache, at the very least. Through the first eight months of 2015, U.S. exports of goods to Canada fell $17.5 billion from the same period last year, accounting for a huge chunk of the $64.5 billion total drop-off.


“While the market has tied itself up in knots stressing over the extent of China’s slowdown, the direct impact of how Canada’s economy is faring is arguably more important for U.S. exports and overall growth,” wrote Bank of Montreal Chief Economist Douglas Porter.

The extent to which governments can dictate a nation’s economy, especially in the near future, is always overblown, never more so than at election time. In this instance, however, the possibility of stimulus being introduced in the aftermath of the election has the potential to influence the short-term outlook for trade between Canada and the U.S.

Some of the new spending, if introduced, would be bound to leak beyond Canada’s border.

In addition, if the mere announcement of such stimulus buoyed Canada’s economic outlook and gave the loonie a lift, imports from the U.S. would become less expensive. On the other hand, concerns that a new Canadian government may be heading in a more profligate direction than its predecessor could inspire further weakness in the Canadian dollar, thereby exacerbating the pain for U.S. exporters.

South Park may have had it right: If U.S. headline GDP growth isn’t awe-inspiring, ‘Blame Canada’ appears to be an appropriate reason why.  

3. Climate policy

In the event that the Liberals or New Democrats form government, Canada may become the first nation in North America to have a national price on carbon, attaching a cost to the negative impact that emissions have on the environment. While this would represent an impressive achievement in its own right—building on the success British Columbia has enjoyed at the provincial level—such an action is only a means to an end.

In Canada's case, the goal of establishing a price on carbon is not just to reduce emissions, but also to alleviate a prolonged problem: constrained oil infrastructure. Opposition parties have proffered the theory that the reason why progress on the Keystone XL pipeline has been nonexistent is because the U.S. is aware that Canada just isn't a credible party to work with on issues pertaining to climate change. Attaining that social license, they argue, is a necessary prerequisite for the approval of these international projects that help get Canadian energy to market.

The notion that good behavior is, however, always the determining factor in international affairs seems incredibly naive. Chinese exports to the U.S., for instance, have grown materially despite continued human rights violations.

This election could end up to be a proving ground for whether energy and climate policy is grounded in a desire to work with environmentally conscious partners or governed by political expediency and economic imperatives.

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