Photographer: Chris Roussakis/Bloomberg

Bank of Canada Decides Trump Isn’t Helping Its Cause

Updated on
  • Trade uncertainty will weigh on Canadian exports, investment
  • U.S. fical stimulus now set to arrive later than forecast

The Bank of Canada has long been searching for growth to rebalance toward exports and business investment to put the economy on a sustainable path.

Now it’s decided U.S. President Donald Trump isn’t helping.

The bank was among the first to attempt to quantify and pencil in the Trump effect on U.S. growth, estimating in January that personal and corporate tax cuts would raise the level of the American economy by 0.5 percent by the end of 2018, while having much smaller positive ripple effects on Canadian activity.

In its April Monetary Policy Report, released with a stand-pat rate decision Wednesday in Ottawa, the bank abruptly reversed course.

Persistent uncertainty about U.S. trade policy prompted Governor Stephen Poloz and his Governing Council colleagues to cut their estimates for export growth and business investment, and also to push back their forecast for when fiscal stimulus stateside will contribute to the expansion.

Congressional gridlock has endured despite a unified Republican government, with lawmakers unable to agree on a palatable repeal and replacement plan for the Affordable Care Act, and corporate tax reform is shaping up to be a lengthy affair that will involve battles with disparate special interest groups.

This lack of a fiscal boost from the U.S. to date and the ever-present threat of disruption to trade loom large globally, weighing on business investment around the world. Canada’s central bank estimated that will crimp Canadian export growth by 0.2 percentage points in 2017 and 2018, according to the report.

Lumber exports, policy makers said, are already being hit by the potential for import taxes that could be applied retroactively in light of the ongoing softwood lumber dispute between Canada and its southern neighbor.

While on net, trade is expected to contribute positively to growth in 2017, that’s because the bank cut its projection for imports by more than it did exports, a testament to moribund capital spending by corporate Canada.

“Canadian firms remain wary, in part, because of concerns about increased protectionism, reduced competitiveness of Canadian firms in the event of corporate tax cuts and regulatory changes in the United States, and possible delays in the implementation of other U.S. policies,” the report read.

Potential barriers to trade via protectionist measures from the U.S. are projected to constitute a drag on Canadian investment growth of 0.5 percentage points for this year and the next.

Policy makers cautioned any gains from protectionism would be outweighed by losses endured by other businesses and consumers, with new barriers poised to have meaningful longer-term costs, echoing sentiments expressed by Poloz in a March 28 speech.

“I find the correlation between economic progress and openness to be striking,” he said. “When trade barriers are falling, when people are coming to our shores and when investment is rising, Canadians prosper.”

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