OTTAWA — It’s not often the Finance Department and the Bank of Canada come so close to bumping heads on major policy announcements — but they will this week.
Both government institutions — linked at the hip, but still staunchly guarding policy independence — are set to reveal their latest economic assessments and forecasts, one day after the other.
And it’s not that current conditions are threatening to go south any time soon. Most forecasters are calling for only mildly lower adjustments in growth patterns over the coming months and into 2018, after fiery — many would say unsustainable — gains in the first half of this year. Interest rates, meanwhile, will likely continue to rise gradually as economic output nears full capacity.
Nor is the federal government’s finances anything to be unduly worried about — notwithstanding major NAFTA rejigging, general discomfort over the direction of the Trump administration and lingering concerns over the impact of tougher mortgage rules on the domestic economy.
In fact, the next annual Liberal budget — date yet to be determined, but probably two or three months into 2018 — is expected to show much less red ink on the fiscal books than previously predicted, thanks in large margin to better-than-anticipated revenues and over-the-top economic growth so far this year.
We’ll get a better taste of what is to come on Tuesday. That’s when Finance Minister Bill Morneau delivers his government’s fall fiscal update, which could include new measures to close more loopholes for some of Canada’s wealthiest taxpayers.
“We’re not expecting any big shifts in fiscal policy at this point, but we will — at least — get some direction,” said Douglas Porter, chief economist at BMO Capital Markets.
“I think the big news there will be just how much the picture has changed, thanks to the much-better-than-expected growth rate this year, giving Ottawa more flexibility,” he said.
“Our advice would be to use most of that flexibility to bring down the deficit and/or improve the medium-term outlook for growth — in other words, focus on tax relief or infrastructure spending.”
Even so, the economy is starting to come back down to Earth — or, at least, back to sustainable-but-slower growth. Instead of quarterly highs as much of 4.5 per cent that we saw in the first half of 2017, Canada’s growth spurt could ease to around two per cent in the second half of this year.
Meanwhile, on Wednesday, the Bank of Canada will lay out its latest economic forecasts in its quarterly Monetary Policy Report, along with an interest rate decision and followed by a news conference in Ottawa.
While many analysts are not anticipating a change in the current one-per-cent lending level, following two increases of a quarter-point — in July and September — the markets will be focused on the central bank’s revised GDP numbers.
Estimates from the previous MPR, published in July, put growth at 2.8 per cent for 2017, followed by two per cent next year and 1.6 per cent in 2019.
Those forecasts were released at the same time as a quarter-point rise to 0.75 per cent in the central bank’s trendsetting lending rate — the first upward move in seven years. That was followed by a hike of equal measure in September, taking the base borrowing cost to one per cent.
Bank Governor Stephen Poloz has since acknowledged there is “no pre-determined path for interest rates from here.”
Indeed, “if the bank needs to ‘monitor’ how the economy is doing with higher rates and other changes in the landscape, we won’t see the next rate hike until the Spring of 2018,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
“But other uncertainties are ones that can’t be assessed by pushing a few buttons on the Bank of Canada’s forecast model. There’s no variable in the model for ‘NAFTA ends.’ There’s no button on the computer for ‘new mortgage rules’.”
This week’s back-to-back economic estimates could serve to highlight the debate over who is actually running the show — the Finance Minister or the Bank of Canada governor. It’s an issue that has fired up sporadically for decades.
Most recently, the issue was vocalized by Poloz himself after a prominent private-sector economist claimed late last year that the central bank “had” to raise its 2016 growth forecast, “since the governor’s boss, Minister Morneau, is out touting the benefits of fiscal stimulus.”
When asked to clarify the fiscal-monetary relationship, Poloz told reporters at the time: “The Finance Minister, sorry, is not my boss.… The Bank of Canada is a fully independent policymaker.”
The federal government would argue otherwise.
Regardless of who is supposed to be running what, Poloz and his monetary team are arguably at the policy forefront, given the overriding impact of interest rates on the economy — from food and housing costs, to the level of the Canadian currency and its influence on cross-border trade.
“I think of monetary policy as being more able to affect the economy in the short to medium term,” said Porter at BMO.
“Fiscal policy definitely takes a backseat in trying to steer the economy over the short term. I think the best thing fiscal policy can do is create a healthy background for the economy to flourish — or it can absolutely frustrate that,” he said.
“Generally speaking, it falls on monetary policy to try to fine-tune the economy as much as possible.”
Special to Financial Post