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Briefing highlights

  • Expect some pre-election goodies
  • Canada’s economy stalls in July
  • Markets at a glance
  • VW takes $3-billion hit on scandal
  • Carney sees near-term rate hike
  • Britain’s GDP growth revised down

Pre-election goodies?

Go ahead, shower me with gifts.

That's what senior economist Robert Kavcic believes could happen as Ontario and Quebec, armed with stronger-than-expected finances, head into elections next year.

British Columbia, too, is sitting pretty among the provinces, though its election is done.

And Ottawa is suddenly looking more flush after its latest fiscal showing, though the Liberals face no immediate vote.

"The fiscal backdrop has swung in a positive direction recently for most of Canada, with accelerating economic growth lining government coffers much more than expected a year or two ago," said Bank of Montreal's Mr. Kavcic.

"Ontario and Quebec have elections looming in 2018, so don't be surprised to see much of these windfalls directed toward firmer program spending and/or tax relief," he added in a recent report.

Here's how he sees things among the four governments:

Ontario

Real GDP growth looks to be headed for 3.2 per cent this year, much better than forecast in the provincial budget.

"The same holds for nominal GDP, with a percentage point surprise translating into nearly $700-million in revenue upside, all else equal (though softer housing activity could scale that back)," Mr. Kavcic said.

But "program spending for fiscal year 2017-18 is already tracking a whopping $9.5-billion higher than where it was projected for this year, two years ago, eating up all of the revenue upside from the stronger economy and cap-and-trade program."

Quebec

Noting Ontario's revenue surprise, Mr. Kavcic added that "the same goes for Quebec, which was aiming for a $2.5-billion surplus before the economy began to trounce budget expectations, also to the tune of a full percentage point this year."

And, he added, "the premier has hinted at tax relief for workers and businesses soon, in either the fall update or 2018 budget.

B.C.

So the government ended up with a fatter-than-forecast 2016-17 surplus of $2.7-billion, or 1 per cent of GDP.

"But the recent budget update quickly ushered the extra revenues through the door to fund recent election promises," Mr. Kavcic said.

"Indeed, $1.6-billion in revenue upside versus the original budget plan was met with a $1.7-billion boost to spending," he added.

"We, along with the rating agencies, continue to hold B.C. on a pedestal as the strongest credit on the provincial landscape, but admit that it could get wobbly with additional major spending priorities in the hopper."

Ottawa

An interesting state of affairs, this.

As The Globe and Mail's Bill Curry reports, Ottawa's 2016-17 deficit ended up $5-billion better than forecast, at $17.8-billion, or just shy of 1 per cent of GDP.

"While an accelerating economy helped in the last few months of the fiscal year (which ended in March), Ottawa apparently couldn't get infrastructure money out the door as quickly as they wanted, leaving total program spending to finish $3.7-billion below recent estimates," Mr. Kavcic noted.

Given that the economy has perked up, with growth coming in much better than anyone expected, this year's budget gap should be "well below" the suggested $28.5-billion. Indeed, Mr. Kavcic's calculations suggest almost $6-billion in "upside" for the budget.

"And, if we assume that roughly $3-billion of spending that didn't get out the door last year does so this year, that could become absorbed by the risk adjustment, still leaving room for a much smaller deficit," Mr. Kavcic said.

"As always, the question is: Does the windfall go toward reducing the deficit, or is it backfilled with more spending?"

That's what his colleague Douglas Porter wants to know, too.

This deficit is already better/smaller than the projected gap as far out as 2022," said Mr. Porter, BMO's chief economist.

"We would suggest, strongly, that with the economy back on its own two feet – to the extent that the [Bank of Canada] is hiking rates aggressively – Ottawa should further trim the deficit, and save its precious resources for when times turn tough."

Now, as Mr. Porter put it, the "great infrastructure boom" is coming. "Any day now …"

Remember that plan?

Mr. Porter noted that government capital spending, which he uses as a "rough proxy" for the funds pumped into infrastructure, has, in real terms, increased by "a moderate" 2.6 per cent from a year earlier.

"While that is a mild pick-up from the prior year, it's both below the long-run average pace for infrastructure gains (more like 3 per cent) as well as the overall economy," he said.

"So, technically speaking, infrastructure spending has actually slightly dimmed overall GDP growth, not boosted it in the past year," he added.

"Most notably, the mild increase absolutely pales in comparison to the real boom in infrastructure spending seen in response to the 2009 recession. In the first year of recovery, these outlays shot up 20 per cent, as provinces and the federal government all pulled together to help yank the economy out of recession. And then it got reeled back over the next few years."

At least for Ontario and Quebec, and already in B.C., Mr. Kavcic added, "at this point, it looks like Canadian governments are leaning toward making it rain, rather than building capacity for a rainy day."

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Economy stalls

Canada’s economy kicked off the third quarter with a marked downshift from the previous three months, with no growth in July.

The goods-producing sector shrank by 0.5 per cent to mark the first decline in five months, on the back of slumps in mining, oil and gas extraction and manufacturing, Statistics Canada said today.

The services side of the ledger edged up 0.2 per cent.

July’s reading comes after spectacular growth in the second quarter, an annual pace of 4.5 per cent, which in turn followed a strong first three months.

Analysts had predicted a slower pace going forward.

“We suspect that the slower start to Q3 gives us the flavour of things to come, with our forecast for the back half of the year tracking half the pace seen at the start of 2017,” said Nick Exarhos of CIBC World Markets.

“That’s another reason why we see the Bank of Canada using a more gentle hand with tightening from here.”

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Markets at a glance

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