The 2016 Federal Budget spends over $100 billion in 5 years, but what does it mean to Canada’s economy, interest rates and the Loonie? MaryAnn speaks with Beata Caranci, Chief Economist, TD Bank Group.
Beata Caranci, Chief Economist, TD Bank Group.
Well, Beata, what does it do--does it do anything to your quarterly forecast?
Not on the near-term, especially with lags in terms of when a budget is announced to when money actually flows out to the provinces, to the individuals, and to the municipalities.
So it's more of a 2017 impact.
It added about three-tenths of a point to our forecast.
So we're forecasting 2% for 2017; had it not been that it would have been a sub-2% number.
But for this year it's very minimal.
You know it doesn't seem like a lot for 100 billion dollars.
I don't know if anybody can fathom that much, but I guess it does move the needle a little bit.
I mean we're operating within a 2 trillion dollar economy so, you know, it is significant and it will stimulate the economy.
But because there are significant expenditures happening on the infrastructure side in particular, that does have lag times in terms of, you know, when it actually turns into a shovel and creates jobs.
And this is why, in the near-term perspective, it has a very modest impact.
It's more the impacts in 2017 and beyond where it will be more material.
So for this quarter you said we have some good news?
So this quarter--this is the first time, overall when we've done a quarterly economic forecast, in about a year that we've upgraded our Canadian forecast.
And we did it before we saw the budget number so it wasn't related to the expenditures that were coming out of there.
The first quarter GDP number is looking like it could be as high as 3% for Canada.
A lot of that is a trade story; very good rotation of growth towards exports.
It's what we've been waiting for.
It's what we didn't get last year that everybody was anticipating, and it was coming through with much--many more lags than we were looking at.
But it does look like it solidified in the first quarter and we could get double-digit growth out of exports, which is great, and the consumers held in pretty well in the first quarter as well.
I don't think that 3% is going to hold as we go forward.
Part of that is catch up from the weakness we had last year so you get a lot of volatility in this data, so we will probably go more towards this 1.5, 2% growth going forward, but it's a great start to the year.
And does it change anything for our interest rates at all?
Not at this time.
Keeping in mind we had extremely weak growth last year . . . Right.
. . . we're projecting about 2% for this year and next year, so it's a very even keel pace of growth.
And what's very important within the numbers--we often think of, you know, what did GDP do, and then you say 2%.
Great, but there's a lot of components in there and where is that growth coming from?
In terms of domestic demand, meaning business investment and consumer spending, that likely will track about 1% this year.
So the gap between the headline number and these domestic demand components is going to be the widest we've seen since 1999.
So if I'm the Bank of Canada and I'm looking, and I'm looking at a structural change in the economy more towards the expert sector, and I'm looking at a generally weak domestic demand profile, I would say you know it's probably safe to sit on the sidelines and watch--allow for the structural rotation to take hold, gain some deeper roots, and then move forward after that.
So we're not looking for a Bank of Canada rate hike probably, you know, until 2018.
So it's still quite a "wait and see"?
A long time, yeah.
Canadian dollar--the loonie.
Anything-- wait, we're a little better right now, but what do you see for that?
So, a very similar story.
Because our Canadian outlook is highly dependant on what's happening in terms of the export sector, the upside to the Canadian dollar is somewhat limited.
If it were to get--rise too quickly and get to too elevated levels, you would start to see your demand side on exports fall and that would compromise your economic growth and that would pull down your currency again.
So you get into these cycles.
So ultimately we feel that the Canadian dollar is likely going to be range bound, somewhere between 72, 73 cents on the low end and 76, 77 cents on the upper end--somewhere in that range--over the course of the next couple of years so you know there's a lot of volatility to the currency.
The one risk is it's been highly tied to movements in oil lately.
And so we saw this nice rebound in oil happen and it's stabilized for the time being, but there is always that risk that the dollar gets batted around with the direction of oil.
And what we've seen since about 2014 is the correlation of the Canadian dollar to oil has really tightened up.
So where oil goes, it can certainly move around our dollar a lot.
And speaking of oil, one thing I noticed in the Federal budget there wasn't a lot for--at least really a lot--for Alberta and all the trouble they've been having.
What do you think of that?
A little tough for the federal government to do policy tailored to provinces because that's what your provincial governments are for and then your municipal governments after that.
So they do have to have, you know, a very broad based national plan.
And they did do some refinement on the employment insurance in terms of enhanced benefits and extended access, so some of that will certainly benefit those provinces that are struggling.
But in terms of a targeted fiscal measure to a particular province, you're correct; there's nothing specific on that front.
Now 100 billion dollars seems like a lot to me for a deficit, but what does it do our long-term debt and our debt-to-GDP ratios?
Yeah, debt-to-GDP ratio is a common way people look at it.
It's your ability to pay off with the size of your economy.
So from that perspective the ratio is rising; it's rising very slowly, incrementally.
But ultimately when you look at our debt-to-GDP ratio relative to our peers, which is generally the G7 countries that we compare ourselves to, it's very low; it's stable.
And so from that perspective we're definitely in good stead.
And also the--what we noticed out of the government is they used pretty conservative assumptions on nominal GDP so it's possible that those ratios could end up being better than we expect if the economy does better going forward.
So so far, so good anyway.
Thank you very much, Beata.
I've been joined by Beata Caranci, Chief Economist, TD Bank Group.
I'm MaryAnn Devenney.
Thanks for watching.