ECONOMIC COMMENT- “We have been Trumped”
2016 will be remembered as both eventful and profitable for investors. Specifically, the Fort McMurray fires were severe and immediately negative to the Canadian economy whereas Brexit and Donald Trump are events which are in development and will shape the political and economic landscape for many years to come.
While Brexit and a long list of European elections in 2017 are important to our economy, the politics and policies of the Trump administration are the most critical for Canadians. What was said on the campaign trail and what is done when in office are two different things. Focusing on some key areas of his platform is a worthwhile exercise as it helps investors set up their expectations for the upcoming political/economic events.
Two policies at the top of the agenda are personal/corporate tax reductions and infrastructure spending. These policies along with reduced regulation for financial institutions have been met with enthusiasm by investors. From November 8 to year end, the Dow Jones Industrials Index put on 1,503 points, an 8.2% increase.
As a result of the Trump victory, economists have increased their forecast of economic growth in the U.S. from 2% to 2.5% in 2017. We agree that increased fiscal spending will be positive to economic growth but the timing of this pickup in growth is likely to be late 2017 or a 2018 story. Investors appear to be excited by the surprise Trump victory and are getting way ahead of reality. Tracking the developments and approval process of these policy changes will be nerve wracking for investors and may provide unexpected volatility in the markets.
For Canada, trade policies are our biggest concern. We have already heard comments about softwood lumber and cattle from the Trump administration. However, Canada is not a low wage exporter to the U.S. as are China and Mexico. Also, Canada is the largest purchaser of goods from the U.S. These two factors should aid in our trade discussions with the U.S. Having said that, politics and perceptions could get in front of good decision making.
On a positive note, there is a high possibility of getting the TransCanada Keystone XL pipeline approved. This huge project along with the approval of the Kinder Morgan Trans Mountain pipeline and Enbridge’s Line 3 replacement program, will spur economic growth in Canada but more importantly will increase our oil export capacity by 1.75 million barrels per day once all projects are complete. With more pipeline export capacity, the oil industry will expand business spending to increase oil production to fill the pipelines.
“At this time” we believe the Trump administration will be positive for growth in the U.S. and therefore positive for the Canadian economy. Trade relations will cause some uncertainty but hopefully we can do a deal with The Donald.
Our specific forecast for GDP growth and CPI inflation is as follows: