Poloz Backs Trudeau, Says Deficits Give Canada 'Better Mix'

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  • Liberal government's debut budget earns key endorsement
  • Central bank still warns of looming economic headwinds

Bank of Canada Governor Stephen Poloz is giving Prime Minister Justin Trudeau’s fiscal policy a ringing endorsement, saying the government’s debut budget will help drive growth.

The central bank held its key lending rate steady at 0.5 percent Wednesday on the strength of a “notable” impact of the March 22 fiscal plan, which included C$118.6 billion ($92.5 billion) in deficits over six years. Without that boost, Poloz said the bank would probably have leaned toward another rate cut.

“I think people take some reassurance that we’ve got a better mix of policies today than we would have without that fiscal change,” the governor told reporters in Ottawa.

The Bank of Canada nonetheless downgraded its growth forecast for 2017 and warned of looming headwinds. While Poloz said Trudeau’s fiscal measures “more than offset the negatives from the other three changes,” pessimism endures.

“We have to wonder where other growth is going to come from,” David Watt, chief economist at HSBC Bank Canada, said in an interview. “It can’t all be from government spending.”

Heading into Wednesday’s rate announcement, HSBC predicted a rate cut would come in October. Poloz’s updated forecast doesn’t reduce the likelihood of that. “If anything, it makes me somewhat more comfortable leaving in a rate cut for later this year,” Watt said.

Comparing Forecasts

The central bank’s monetary policy report projects government spending will add 0.5 percentage points to gross domestic product in the fiscal year that began this month and 1 point in the fiscal year that begins next April.

Those figures match the forecasts in Finance Minister Bill Morneau’s budget. Those forecasts use “reasonable estimates” of the multipliers for its spending, the central bank said. “It’s not a forecast competition,” Poloz told reporters after the decision.

Trudeau and Morneau had campaigned largely on infrastructure spending as a tool to drive growth, though the central bank noted such programs typically involve delays in getting funds out the door. The impact of Trudeau’s expanded transfers to households is also difficult to predict.

“We can’t be entirely certain about the full effects of the budget on the economy, as some will depend on how households react over time,” Poloz said.

Spending Boost

The bank’s report expects total direct government spending to add 0.5 percentage points to growth in the 2016 calendar year and 0.6 points in 2017, though the impact of the budget will be widespread. For instance, consumption spending -- supported by increased child benefit transfers, Trudeau’s marquee policy -- is projected to add 1 percentage points to growth in 2016 and 1.2 points in 2017.

Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce in Toronto, said in a note Wednesday that Poloz “HAD to raise its 2016 growth forecast, since the Governor’s boss, Minister Morneau, is out touting the benefits of fiscal stimulus.”

Asked for a reaction, Poloz said the bank believed the government’s forecasts are reasonable. “If for some reason we were in total disagreement with some analysis in the budget, we would say so,” he said. “The finance minister, sorry, is not my boss.”