Briefing highlights
- Trudeau prepares for the Trump era
- Trade, jobs, housing, deficits in spotlight
- Valeant sheds assets to pay down debt
- Gildan wins bid for American Apparel brand
Trudeau's challenges
We’ve seen some decent numbers of late, but one month does not a healthy economy make.
Indeed, Prime Minister Justin Trudeau’s new cabinet, already battling high unemployment and the lingering fallout from the oil shock, faces some hefty new challenges as it heads into the Trump era.
The latest Canadian indicators show a bounce in exports and an equal bounce in job creation, but those numbers are monthly and follow a string of weak readings.
In his latest outlook, Bank of Montreal chief economist Douglas Porter now believes the fourth quarter of 2016 ended on a stronger note, with growth of 2 per cent annualized. He suggests that Canada’s economy will see about the same pace of expansion this year.
“While not exactly rip-roaring, 2-per-cent growth is a big step up from the average growth rate of barely 1 per cent over the past two years and is close to the underlying trend in the economy since 2000,” Mr. Porter said.
There’s a huge but here, and it’s the but everyone is worried about: Donald Trump’s protectionist stance. The president-elect’s threats have largely been aimed at Mexico and China, to date, but observers warn Canada will not escape, particularly as it’s part of the North American free-trade pact that Mr. Trump demands be renegotiated or even shredded.
“From a Canadian perspective, clearly the biggest risk to that more upbeat call for 2017 growth is the possibility of serious protectionist measures from south of the border,” Mr. Porter said, noting that the most recent developments haven’t been particularly good.
“Between a known trade hawk being named to the trade representative post and president-elect Trump’s warnings to first Ford, then GM, then Toyota about producing outside of the U.S., it’s tough to be encouraged about the outlook for capital outlays anywhere outside U.S. borders at this point,” he added.
“And the auto industry in particular matters in a big way to Canada.”
All of which is why, as The Globe and Mail’s Robert Fife reports, Mr. Trudeau is poised to retool his cabinet as early as today.
Here’s what he and his newly appointed cabinet members will have to jostle with:
Trade
This is the biggie on which everything else rests.
We know Mr. Trump’s team wants to overhaul or kill NAFTA, and that its known targets are livestock and lumber.
But there’s so much more at stake given Mr. Trump’s vague targets at this point. The Republicans, just an example, are also proposing a “border adjustment tax” that could whack Canada, which ships about 80 per cent of its exports to the U.S., to the tune of around 20 per cent of gross domestic product.
One need only look at Mr. Trump’s appointments.
“The nominations of Peter Navarro to lead a newly formed National Trade Council and Robert Lighthizer to be the chief U.S. trade representative means that two of the most ardent protectionists will now have key roles in shaping Trump’s trade policy,” said Paul Ashworth, the chief North America economist at Capital Economics.
“Most of their ire so far has focused on China and Mexico, but it would be foolish to think that Canada will somehow escape unscathed,” he added in a recent report.
“In particular, we can expect Lighthizer to be very aggressive, applying anti-dumping and countervailing duties wherever U.S. trade associations feel that foreign competitors, including Canadian ones, are receiving any unfair advantage. Even if Canadian firms could get the [World Trade Organization] to rule in their favour, it will take years to secure a judgment, and Lighthizer has argued in past congressional testimony that the U.S. should not be bound by WTO rules anyway.”
Economic growth
As BMO’s Mr. Porter noted, an expansion of 2 per cent is hardly rip-roaring. And some other economists don’t even see it as that good.
And, of course, given the shifts in the economy, regional showings will differ.
“Canada’s economy is stuck in first gear,” senior economist Sal Guatieri, Mr. Porter’s colleague at BMO, said in the bank’s most recent forecast last week, and will shift into second this year as U.S. demand picks up and the oil-dependent provinces rebound.
Again, though, that won’t be rip-roaring, and so much will depend on the new U.S. administration.
“The underlying performance of Canada’s economy remains modest at best,” said Toronto-Dominion Bank economist Diana Petramala.
Jobs
We saw decent full-time job-creation in the latest Statistics Canada report, but the unemployment rate remains elevated at 6.9 per cent.
And it’s expected to hover close to the 7-per-cent mark for some time yet.
As TD’s Ms. Petramala noted, 2016 marked the third straight year of employment growth of less than 1 per cent. And while December marked a strong month for full-time work, most of the positions gained in 2016 were part-time.
“The unemployment picture is unlikely to improve much in 2017,” Ms. Petramala said.
“Oil-producing regions will likely start to gain some ground as demand for Canada’s energy products continues to pick up,” she added. “... Still, any recovery in oil-producing regions is going to be gradual.”
Deficits
Canada still has its triple-A rating, and isn’t likely to lose it, but there’s a lot of pressure on Finance Minister Bill Morneau as he preps his second budget.
The provinces want more money, the favoured middle class wants more money, and as The Globe and Mail’s Bill Curry reports, a federal study is forecasting decades of deficits. So many that some of us will be long dead before the budget rebounds to life.
Moody’s Investors Service, for example, has a stable outlook for the country, and doesn’t expect that to change.
There are caveats, however, notably high house prices and swollen consumer debts.
“The rating could come under pressure over the long-term should there be an erosion in political consensus to maintain sound public finances and government debt ratios rise,” Moody’s said.
“Material deterioration in Canada’s economic potential and resilience to shocks that impair affordable financing from international investors and the health of the financial system would be credit negative.”
Housing
Moody’s is hardly alone in citing high home prices and fat debts. Just about everyone is fretting, and Toronto, in particular, will keep policy makers on their toes.
Ottawa has already brought in tax and mortgage measures aimed at cooling down markets. And, coupled with the B.C. tax on foreign buyers of Vancouver area real estate, that city is indeed already cooling off.
But all eyes are on Toronto, which is still on fire and appears to be getting some of the foreign money that Vancouver is driving away.
Analysts expect price growth to cool in Toronto and its hot nearby communities, but there are red flags here.
“If Toronto’s market doesn’t pipe down, it will continue to fan household debt and become ever more vulnerable to a correction when demand fundamentals weaken,” said BMO’s Mr. Guatieri.
Valeant sheds assets
Valeant Pharmaceuticals International Inc. is shedding more than $2-billion in assets, medicine for its severe headaches.
Among the deals aimed at helping to pay down debts is the sale of three skincare brands to L’Oreal.
Canadian Apparel?
Canada’s Gildan Activewear is poised to take over the American Apparel brand, having won an auction for about $88-million.
It’s not buying the stores, just the brand and some production facilities.