The first weeks of the Trump administration have been action-packed with executive actions. Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank Group, to sort out what really matters to the U.S. and Canadian economy and the Canadian dollar.
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00:00:03.519 Hello, and welcome to the show.
00:00:04.810 I'm Kim Parlee.
00:00:05.435 Thank you so much for joining us.
00:00:07.170 Well, if you're like me, you've been watching the TV.
00:00:09.744 You've been reading the headlines.
00:00:11.160 And Donald Trump is plastered everywhere.
00:00:13.035 And it seems every five minutes, we're hearing about something new and the impact
00:00:16.410 that it could have on the markets and the economy.
00:00:18.690 I myself was feeling a little bit exhausted.
00:00:20.610 So I want to sit down with someone who could basically cut through it all
00:00:23.651 and tell us what she is focused on.
00:00:25.349 So I had a chance to sit down with Beata Caranci.
00:00:27.390 She's chief economist at TD Bank.
00:00:29.130 And I asked her just to please level set-- tell us
00:00:32.400 what is important to watch right now.
00:00:35.637 Some things have changed, and some things haven't.
00:00:37.720 So what hasn't is that the US economy had strong momentum going
00:00:42.490 into the new presidency and continues to maintain it.
00:00:45.560 So he has inherited a very solid fundamental economy.
00:00:49.990 That remains the same.
00:00:51.820 Obviously, with the inauguration--
00:00:54.760 the days that followed, we had a lot of executive orders announced.
00:00:57.632 Nobody quite knew what those executive orders--
00:00:59.590 where the priorities were going to be.
00:01:01.173 We're starting to see where they are.
00:01:03.670 There's been-- in terms of immigration, ban on seven countries
00:01:07.330 from a temporary perspective.
00:01:09.430 These are not typically pro-growth policies.
00:01:11.910 So what I think many had expected is that you would
00:01:15.280 come into the new presidency with a focus on corporate and personal income
00:01:20.140 tax reform, which was really a key pillar of the election campaign.
00:01:25.460 And in fact, that looks like now it's going to be negotiated over the summer, perhaps
00:01:29.920 some implementation by the end of the year, real impacts not occurring to the economy
00:01:33.670 till 2018.
00:01:34.972 And instead, what we're hearing right out of the gate
00:01:37.180 are things that inhibit immigration, things that inhibit trade.
00:01:41.890 And so all of those tend not to be pro-growth policies.
00:01:44.960 So what we're getting is more of the stickiness on the policy side,
00:01:49.270 as opposed to the ones that lubricate the economy.
00:01:52.329 The stickiness you talk about--
00:01:53.620 I mean, do we have a sense of-- and again, early days--
00:01:57.370 but is it friction?
00:01:59.620 Is it going to slow things down?
00:02:01.420 Because the markets, the equity markets, have priced in all the upside
00:02:06.310 from tax and fiscal spending.
00:02:09.250 But do we understand the impact of this friction
00:02:12.690 from trade, immigration, all that kind of stuff?
00:02:14.690 Still too early to know for certain on that.
00:02:17.780 So I think markets are very much in a wait-and-see mode.
00:02:20.860 We had a Federal Reserve Central Bank meeting a week ago as well.
00:02:25.240 And they even took a very wait-and-see approach as well,
00:02:28.036 in terms of not commenting on anything.
00:02:29.660 And that's what we would expect.
00:02:31.550 We never actually built in any fiscal stimulus
00:02:34.180 into our forecast for exactly this reason.
00:02:36.420 So we approached it from a conservative perspective,
00:02:38.710 with the understanding that fiscal policy changes do--
00:02:42.970 especially when you're talking about tax reform--
00:02:46.090 that's huge.
00:02:47.200 We've seen many attempts at this in the past.
00:02:49.720 Even bipartisan agreements fall through.
00:02:52.090 So we want to make sure that we see the policies before we
00:02:54.577 start building them into the forecast.
00:02:56.160 So I think from the market's perspective, the euphoria has gone as far as it can,
00:03:00.910 based on the speculation of what's to come.
00:03:03.100 And now we need to see the government start to deliver on some of those things,
00:03:06.580 like the tax reform in particular, to give business investment a boost, household
00:03:11.560 consumption a boost as well.
00:03:13.170 So I actually don't think we're going to see those measures until the end of this year,
00:03:16.795 potentially 2018.
00:03:18.340 But the market, as long as it's still on the table, I think,
00:03:21.250 will remain relatively stable, as long as there's
00:03:23.740 nothing that's saying we're changing direction from those expectations.
00:03:26.931 Now, there's lots of other things, too, in terms
00:03:28.930 of deregulation, all that kind of good stuff, that they talk about as well.
00:03:32.380 What I thought was interesting in a note you put out recently is you
00:03:35.213 talked about the fact that business investment is ripe to accelerate
00:03:39.100 and showing the numbers in terms of manufacturing,
00:03:41.620 small business confidence, all that kind of stuff.
00:03:43.900 Is the friction going to impact that?
00:03:46.360 Yeah, so this is where, left to its own devices,
00:03:50.710 the US economy is already on a path where you're
00:03:53.190 seeing a recovery in business investment, which was actually
00:03:55.690 quite disappointing in the last couple years, in part because of the energy sector.
00:03:59.800 That really hollowed out a big investment initiative for the last two years.
00:04:04.990 And that's part of the recovery.
00:04:06.700 But we've always seen, in the US, that corporate profits have
00:04:09.580 been very high as a share of the economy.
00:04:11.912 We just haven't seen that flow through to investment.
00:04:14.120 It's not a US story.
00:04:15.340 It's an actual international story.
00:04:17.890 But it's possible, with the positive sentiment
00:04:21.820 that's happening in the US among small businesses and others,
00:04:24.460 with things like deregulation on the table, that you can get a bit of an animal spirits
00:04:28.600 here, where you have companies who have been sitting on cash and being conservative,
00:04:33.580 with uncertainty on the outlook, now feeling a bit more confident
00:04:36.460 in the fundamentals of the US economy.
00:04:38.470 And if we get corporate tax initiatives that help in that way,
00:04:41.800 you get a little bit of an accelerator to that sentiment.
00:04:44.590 So it's certainly possible that we're going to see--
00:04:48.040 we absolutely expect growth in business investment.
00:04:50.370 We're already starting to see the tailwind of that coming through.
00:04:53.230 But we think it's possible-- if you do get policy initiatives that
00:04:56.290 are promoting it in 2018, it will act as an accelerator
00:04:59.920 to momentum that's already there.
00:05:02.110 Let me ask you-- to get very tactical for a second--
00:05:04.330 I mean, you talk about tax, and you don't see that happening till 2018.
00:05:07.570 You wrote a note recently about destination-based cash flow,
00:05:11.200 talking about the different taxation possibilities.
00:05:14.590 What is that, and what does that mean, so that people
00:05:17.274 can understand what the impact could be.
00:05:18.940 So this is why it's commonly referred to-- the acronym is BAT, or BATS--
00:05:23.470 Border Adjustment Taxes.
00:05:24.880 And so this is a concept that--
00:05:27.760 for the US, their tax base right now will tax profits, so
00:05:32.036 your revenues minus your expenditures, and you tax your profits
00:05:34.660 at 35%, whatever it's going to be.
00:05:37.840 And so the notion is that now what they are going to do
00:05:40.570 is perhaps put out a policy where they lower that tax rate to 20%, 25%, whatever
00:05:46.090 they choose that metric to be.
00:05:48.040 And they are not going to tax anything that you ship out as an export.
00:05:52.390 So any revenue that's related to export revenue--
00:05:55.780 it's going to be tax-free, so not as part of your profit tax base.
00:05:59.800 But on the flip side, where you would have received a tax credit on your expenses,
00:06:05.980 if those expenses are related to imports, you no longer get to claim that.
00:06:09.540 So your taxes will rise if you're a higher import company, where your products are
00:06:15.610 used for domestic consumption.
00:06:16.910 And if you're an export-oriented company, your tax base will drop.
00:06:21.070 And so you're shifting your wealth from those companies that are importers over
00:06:27.550 to those that are exporters.
00:06:29.460 And so this is where you're getting a lot of chatter happening in terms of this
00:06:33.460 could be quite negative for Canada, because you're
00:06:36.490 going to have much more competitive exports come into the market as a result of it,
00:06:40.150 and import prices rise in the US.
00:06:42.670 I want to get to Canada because that's a big deal.
00:06:44.890 I just want to put that aside for a second.
00:06:46.681 But are there any unforeseen consequences of that even happening in the States?
00:06:49.973 Because I know with all these things, as you know,
00:06:52.056 this is what you do is policies are put in place.
00:06:54.640 But they said, well, what about this, and you see all the ripple effects go elsewhere.
00:06:58.223 So is it going to do what it intends to do in the States?
00:07:00.630 There's two offsetting impacts that start to happen that is anticipated.
00:07:04.990 One is when your relative prices of exports to imports fall, what will likely happen
00:07:11.450 is the US dollar is going to rise.
00:07:13.270 And so part of the higher taxes that importers are paying for
00:07:17.934 will actually have a little bit of a benefit from the fact
00:07:20.350 that the dollar rises and they're importing at a slightly lower cost.
00:07:23.260 So this is what the government is counting on, some kind of an offset to the taxes
00:07:28.300 being really hit hard on the importers of the US.
00:07:31.510 Having said that, it's more likely you're going
00:07:33.910 to see a pass-through to higher consumer prices,
00:07:36.010 because ultimately, industries that have very high import content
00:07:41.470 are your clothing industries, your electronics industries.
00:07:46.112 Auto's obviously crossing the border many times
00:07:48.070 over, potentially five times in the case of Canada and the US.
00:07:51.520 So ultimately you could pass on higher consumer prices.
00:07:55.720 So on the one hand, you're anticipated to lower personal income taxes.
00:08:00.060 And then on the other hand, you're forcing people to pay more.
00:08:02.950 And those areas where those taxes are likely to get
00:08:05.890 hit the most are going to be things like clothing, which disproportionately
00:08:09.940 hit lower-income individuals.
00:08:11.600 So those are those unintended consequences, where
00:08:15.220 they're trying to level out the playing field on their trade deficit, but at the end,
00:08:19.420 someone's got to pay for it, and it'll also be the American consumers
00:08:22.660 themselves paying for it.
00:08:24.099 Welcome back.
00:08:24.640 We've been just talking to Beata Caranci.
00:08:26.348 She's the chief economist at TD Bank.
00:08:28.502 And talking to her about, again, cutting through all the noise of everything that's
00:08:31.960 going on with President Trump and trying to understand what really matters
00:08:34.659 and what she's focused on.
00:08:36.010 She outlined what was going to happen with the States in her opinion, things to watch.
00:08:39.760 And now we want to turn that conversation to Canada and this unexpected thing
00:08:43.592 she thinks that could happen.
00:08:44.800 Take a listen.
00:08:47.030 Canada is actually not the target or the main area
00:08:50.610 of interest for the US in terms of the trade composition.
00:08:54.600 It's really Mexico.
00:08:56.010 And frankly, the deficit is largest by a wide measure with China.
00:09:01.750 So it's not only deteriorating in terms of the trade deficit in the US,
00:09:06.360 but it's continuing to widen against China.
00:09:08.220 At least with Mexico as a share of the US economy, it's stable.
00:09:11.700 And with Canada, there's a lot of misconceptions there.
00:09:16.170 Canada runs a deficit with the US when it comes to services.
00:09:19.650 So we import more than we export.
00:09:21.510 And we also run a deficit in goods when you strip off oil and gas.
00:09:26.130 So we have, if anything, very fair trade with the US.
00:09:30.664 And I think the Canadians actually have a case
00:09:32.580 to be made that we're running deficits in these two big components.
00:09:36.244 And really, it's the oil and gas sector that's
00:09:38.160 allowing us to run a goods trade surplus, just that one sector.
00:09:41.260 What about business investment animal spirits?
00:09:44.075 I mean, you talked about that in the States, and it
00:09:46.200 could reignite things, but at the cost of--
00:09:48.740 I'm just thinking human nature.
00:09:51.440 If I have factories--
00:09:53.274 and I'm not saying this is common.
00:09:54.690 But if you could have the choice to build here or in the States,
00:09:58.306 you would choose the south.
00:09:59.930 So businesses don't like uncertainty.
00:10:02.040 And certainly from the Canadian perspective, while the US is benefiting,
00:10:05.730 I think, from the feeling that it's not going to be worse for them
00:10:09.020 and that the risks are to the upside in terms of what
00:10:12.412 they might see in tax initiatives and the boost
00:10:14.370 to investment, I think Canada's literally the opposite, that our key market for exports
00:10:20.430 is looking a lot more uncertain in terms of market access
00:10:24.000 and in terms of our cost structures that are going to be affected.
00:10:26.980 So it could certainly delay investment decisions
00:10:30.420 until businesses get a sense of what does that platform look like,
00:10:35.620 what does that environment look like.
00:10:37.330 And we already in Canada have seen delayed investment intentions.
00:10:40.330 We already have a low level of investment happening.
00:10:42.510 Like I said earlier on, there's a global phenomenon happening.
00:10:45.093 So this certainly doesn't help in that respect.
00:10:47.470 The one exception that we're starting to see come through the data
00:10:50.220 is, again, this oil and gas sector.
00:10:52.660 We've seen a lot of activity pick up in the US and Canada
00:10:57.120 with the stabilization of oil prices and with projects coming online in Canada.
00:11:00.630 So that's offering pretty much of a bright light at this stage,
00:11:03.750 that we're bouncing off very low levels.
00:11:05.500 And that can give a nice boost to GDP in the coming year.
00:11:10.260 But outside of that, if you're a manufacturer, if you're in the auto sector
00:11:14.880 and you're hitting capacity pressures, odds are you're
00:11:17.400 not going to be too aggressive on the expansion side
00:11:19.680 until you know what that market looks like.
00:11:21.600 I've got about a minute left, so I'm going to try and squeeze two things in--
00:11:26.292 What does this all mean for Canada?
00:11:27.750 And also benefits-- how will we benefit from what's going on in the States right now?
00:11:31.349 Because I've heard anecdotally.
00:11:32.640 And I know this is material, but immigration-- we
00:11:35.820 could see a flow of immigration into Canada.
00:11:38.730 That's possible, in terms of the high skilled, because so far,
00:11:42.930 what we've heard out of the new administration is not pro-immigration.
00:11:46.890 And they're even wanting to take a look at the H1B visa, which
00:11:50.580 is their skilled immigration.
00:11:52.290 So a lot of opportunities from that perspective.
00:11:55.600 There's also the opportunity that, if this new administration
00:11:58.980 doesn't make Canada the center of their focus and does
00:12:01.530 make China and Mexico more the focus, Canada has been losing market share to the US
00:12:07.290 to these countries.
00:12:08.290 So there is an opportunity there, if we're not that center of tax base that happens,
00:12:14.400 we could pick up market share or at least not continue to lose market share.
00:12:18.010 So those are some positive that could flow through.
00:12:21.110 It's too early to know.
00:12:23.280 And at the end of the day, what the heck does this mean for the loonie?
00:12:26.238 Because it's been interesting.
00:12:27.630 There is the potential that we can see some downward pressure.
00:12:30.040 I would say if you look at the balance of risks around the loonie,
00:12:32.790 they would be over-weighted to the downside right now, relative to the upside.
00:12:36.690 If the US does put in a border adjustment tax, in order for that to be neutral,
00:12:43.380 meaning not affecting global output, it would require
00:12:46.530 the US dollar to rise by as much as 25%, which is unlikely to happen.
00:12:51.210 But it gives you a sense of where the risks lie to the US dollar
00:12:54.540 and where the risks on the downside lie for the Canadian dollar.
00:12:58.020 Great conversation with Beata Caranci. chief economist at TD Bank.
00:13:01.215 And again, just great insights in terms of what she's seeing right now.
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