Warning about risks of Trump trade policies

The Bank of Canada is warning there will be “material consequences”

OTTAWA — The Bank of Canada is warning there will be “material consequences” for the economy if protectionist policies come to fruition under U.S. president-elect Donald Trump.

Governor Stephen Poloz says the combination of the heightened uncertainty around U.S. trade policy and the still-sluggish Canadian economy has left the door open to a potential cut to the central bank’s benchmark interest rate.

Poloz’s comments came Wednesday after the bank made its latest decision on the trend-setting rate, which, as expected, was left unchanged at 0.5 per cent.

The bank also released its latest monetary policy report, which contained the bank’s first updated forecasts and broad economic assessment since the November election victory by Trump, who will be sworn in Friday.

The quarterly document was published amid bleak warnings from experts about the potential fallout for Canada from Trump’s promised policies. Leaders around the world have been scrambling to gauge what shape Trump’s changes could take as well as when — and if — they will be implemented.

On one hand, the Bank of Canada offered an optimistic outlook by largely sticking with its growth expectations from October, before the U.S. presidential election. The bank predicted Canada’s real gross domestic product to grow by 2.1 per cent this year — up from its two per cent forecast in October — and again by 2.1 per cent in 2018.

But when it came to Trump, the bank cautioned that its outlook only factored in the possible effects of an expected U.S. fiscal boost. It said the anticipated fiscal expansion in the U.S., Canada’s largest trading partner, would help the economy through increased foreign demand.

The bank also incorporated Trump’s vow to cut corporate taxes — something it said would threaten Canadian competitiveness.

It said it did not account for the full range of Trump’s promised policy changes.

“While prospective protectionist trade measures in the United States would have material consequences for Canadian investment and exports, these measures have not been included in the base case,” said the bank, adding the outlook should be viewed as a “reasonable starting point” that will be updated as Trump’s plan takes shape.

“The outlook, however, is subject to considerable uncertainty, given the unknowns around policy actions by the incoming U.S. administration, particularly concerning trade.”

There has been significant talk in the U.S. about a border tax on imports as well as Trump’s pledge to rip up the North American Free-Trade Agreement.

Due to the additional unknowns, Poloz told a news conference that “a rate cut remains on the table.”

His statement immediately drove down the Canadian dollar.

Poloz said the bank had yet to conduct internal assessments on the tax and trade ideas floating in the U.S. due to a lack of information and the complex nature of such an analysis.

“But needless to say we’re on top of this in the sense that we’ve got our tools there,” he said.

“As soon as we have a little more understanding of what might be coming then we’ll be considering using our models, what those shocks might mean.”

Aubrey Basdeo, head of fixed income for BlackRock Canada, said there are so many variables that it’s difficult to analyze the impacts of a U.S. border adjustment tax and drop to its corporate tax rate.

“We cannot underestimate or under play the negative impact from the potential for these policies,” Basdeo said.

David Watt, chief economist at HSBC Bank Canada, has been predicting a rate cut since the fall and he doesn’t think it will take much going forward to nudge Poloz towards lowering the benchmark.

Canadian government officials have been trying to develop a good relationship with members of Trump’s inner circle and build a case to shield the economy from policy changes.

Prime Minister Justin Trudeau has said that senior government officials have had “constructive and positive discussions” with Trump’s team.

Until more information is available, the Bank of Canada said it’s expecting economic activity in Canada to be propelled by the improving U.S. and global economies as well as Ottawa’s stimulative measures, which include billions of dollars in infrastructure investments and the child-benefit cheques.

The report predicted household consumption to be the main contributor to growth in 2017, with considerable help from government spending and a “moderate” expansion of total exports over the next couple of years. It also underlined the importance of the continued growth of Canada’s service sectors.

The bank’s rate decisions primarily hinge on its inflation expectations and it said low readings of late were largely due to weaker food prices, which are expected to dissipate.

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