Briefing highlights
- What to expect from GDP report
- Global markets tumble on trade fears
- New York poised for weaker open
- Canadian dollar below 78 cents
- Whither Bank of Canada rates
- What a trade war could mean
- EU warns of retaliation
- Trump says trade wars ‘easy to win’
- Maricann financing falls through
The new economy
Canada's economic prospects are iffy at best today, with growth slowing and the threat of a brutal trade war.
And then there's the weak loonie, though that could at least be good news for the country's exporters.
Here's where things stand:
The economy
Canada enjoyed a spell of hefty, and unsustainable, spell of heady expansion that came to an abrupt halt in the third quarter of last year with annualized growth in gross domestic product of just 1.7 per cent.
And today, Statistics Canada is expected to report a weak December and fourth-quarter growth of between 1.7 and 2.1 per cent, according to economists.
"The Canadian economy maintained its slower second-half pace after a torried fourth-quarter run (2016 Q3 - 2017 Q2) where growth averaged 3.6 per cent, the strongest since 2018," Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist, and BMO senior economist Robert Kavcic said in a lookahead to today's report.
"Consumer spending is expected to decelerate somewhat, but still clock in at a solid 2.3 per cent, after averaging 4.2 per cent in the first three quarters of 2017," they added.
"Buasiness investment likely accelerated modestly, as imports of electrical equipment surged in the quarter. Housing should benefit from a small increase in starts and a temporary jump in home sales ahead of the new mortgage rules."
Government spending is believed to have slowed down, though still being positive, and exports are projected to come in weak.
The loonie and interest rates
The Canadian dollar has tumbled from about 81.5 US cents in early February to below 78 US cents today, hit by a stronger greenback amid market turmoil and redrawn expectations of what the Bank of Canada will do.
The central bank has already raised its benchmark overnight rate this year, and was expected to do so up to three more times in 2018.
But there's a lot of uncertainty surrounding that, heightened by negotiations to remake the North American free-trade agreement, and now President Donald Trump's pledge to hit steel and aluminum imports with tariffs.
As The Globe and Mail's Steven Chase, Greg Keenan and Adrian Morrow report, Mr. Trump said yesterday he plans to bring in 25-per-cent tariffs on steel imports, and a 10-per-cent levy on aluminum.
The U.S. dollar has actually dipped, though the loonie remains under pressure, trading between 77.6 and 78 US cents so far.
"Many of the U.S.'s main trading partners have said they will respond with reciprocal action," said Adam Cole, Royal Bank of Canada's chief currency strategist in London.
"Generally, restrictions on world trade would be less negative for relatively closed economies, like the U.S., and hence positive for the USD," he added, referring to the U.S. dollar by its symbol.
"But the risk of a bilateral trade war with China makes the current situation different, given China's large holdings of [U.S. treasuries]."
Canada is a big exporter, and Ottawa doesn't know at this point whether it would be exempt from the U.S. trade action. But any move to include Canada would rippled through the economy, well beyond just the exporters affected.
"The direct impact of these tariffs would be inflation for the U.S. and, by opening up some economic slack, deflationary for Canada," Royce Mendes and Avery Shenfeld of CIBC World Markets said in a report on Thursday's announcement by Mr. Trump.
"If these plans move forward with Canada explicity included, expect some further depreciation of the Canadian dollar, which would add back some inflation pressure," they added.
"But given the negative impacts on economic growth, the Bank of Canada is likely to tolerate the inflation coming from [Canadian dollar] weakness, so overall, a tariff war leans towards a more patient central bank in terms of additional rate hikes."
The central bank, which is expected to make no changes when it meets again next week, has already flagged NAFTA as a concern.
The threat of a trade war
Canada and others have said they'll respond to any such move, and the threat alone sent shivers through the markets Thursday.
NAFTA is not yet resolved, and Mr. Trump has threatened to kill it, though observers believe it will survive in a different form. Having said that, Canada has already taken the U.S. to the World Trade Organization over its practices, so it's hardly a cozy relationship.
Now, economists warned, steel and aluminum tariffs would hit Canada hard.
"If implemented, it could represent a stiff blow to Canadian industry," said CIBC's Mr. Mendes and Mr. Shenfeld.
"The country is the largest supplier of both commodities to the U.S. … and, at least for now, there was no mention of any exemption for Canada," they added.
"The lack of any exemption could reflect American concerns that China is dumping certain goods onto the U.S. market, using Canada as a back door, or simply the loss of the special status that the U.S. previously accorded its northern neighbour."
Remember, the U.S. has already hit Canadian softwood lumber, and tried to whack Bombardier Inc.
But where the latest threat is concerned, "the economic effects could be more biting for the Canadian economy than previous moves by the administration," said Mr. Mendes and Mr. Shenfeld.
Read more
- U.S. unveils steep tariffs, raising peril of trade war
- EU warns of retaliation against any U.S. steel, aluminum tariffs
- Trump tweets: ‘Trade wars are good, and easy to win’
- Canadian dollar goes south (so maybe you shouldn’t)
- ’Dead CAD bounce’: Why TD sees the Canadian dollar as ‘our favourite short’
- Crazy as a loon: The chasm in forecasts for the Canadian dollar
The announcement of these tariffs is poorly timed, as the recovery in global stock markets was starting to show signs of slipping, and now dealers are dumping equities
David Madden, CMC Markets
Stocks tumble
The threat of a global trade war looms over markets this morning, with stocks down sharply and New York poised for a weaker open.
"Stock markets are firmly in the red as traders are concerned about a trade war," said CMC Markets analyst David Madden.
"'When it comes to tariffs, it can be a tit-for-tat game, and investors will be worried about a potential reaction from the likes of China," he added.
"The announcement of these tariffs is poorly timed, as the recovery in global stock markets was starting to show signs of slipping, and now dealers are dumping equities."
Tokyo's Nikkei lost 2.5 per cent, Hong Kong's Hang Seng 1.5 per cent, and the Shanghai composite 0.6 per cent.
In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by between 0.8 and 2.1 per cent by about 6 a.m. ET.
New York futures were down.
"The German DAX is leading the decline of European markets this morning, as stocks continue to slide in what has turned out to be another week of radical losses across global indices," said IG market analyst Joshua Mahony.
"While Donald Trump considers himself pro-business, the imposition of tariffs across the aluminium and steel sector has led to fears over a collapse in global trade. The threat of a trade war was always likely to hit the export driven German economy hardest."
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