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Don't expect Liberals to change course on economic policy – The Globe and Mail

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Justin Trudeau’s Liberal government isn’t expected to change tack on fiscal policy when Finance Minister Chrystia Freeland delivers the fall economic statement on Tuesday, or in next spring’s budget.CHAD HIPOLITO/The Canadian Press

Inflation has become a chilling worry. The economy is recovering faster than expected. So will Justin Trudeau’s Liberal government change tack on fiscal policy and pull back on the $101-billion stimulus announced in its April budget? Or its $78-billion in election promises?

No.

It’s not in their political DNA.

This is a government that always talks about stimulating the economy, including the vulnerable in it, and having people’s backs with public funds – not about cooling off demand, pulling back, or tightening belts.

That won’t change dramatically when Finance Minister Chrystia Freeland delivers the fall economic statement on Tuesday. The Liberals aren’t planning a sea change in next spring’s budget, either.

Many economists argue Ms. Freeland should cut back a chunk of the stimulus package announced in April because of strong job and economic growth and inflation running at the highest rate in years. Don’t expect that.

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The revenue and deficit projections in Tuesday’s statement will look presumably better than in April – inflation actually helps that in the short term – but don’t take that as the signal the Liberal government will shift gears to focus on balancing budgets.

That’s not the way they have done things in six years in power. When deficit projections come in better than previously forecast, as they often did, the Liberal government saw that as creating room to spend more.

On Tuesday, Ms. Freeland will be able to use lower deficit forecasts to argue there is room for additional spending – some now, in Tuesday’s economic statement, including more measures to deal with the COVID-19 pandemic, and more to come in next spring’s budget.

The Finance Minister will have to talk about inflation, but the Liberals have so far largely cast that as an issue of affordability, and argued that subsidized child care and measures aimed at alleviating high housing costs will ease the pain.

There is a political clamour – from left and right, as well as provincial and municipal administrations – for Ottawa to do something. So Ms. Freeland might signal action is coming on election promises to institute a house-flipping tax and curb foreign ownership of residential housing.

But the big picture, the plan to spend huge sums on a recovery plan and keep adding more, isn’t going to be hacked back.

There are plenty of people telling them they should, and not only their Conservative political opponents.

Economists have suggested the government should at least take their foot off the gas fuelling demand.

Robert Asselin, senior vice-president of the Business Council of Canada and former policy adviser to Ms. Freeland’s predecessor, Bill Morneau, recently penned an article arguing that the Liberals’ huge recovery spending should be rejigged because the economy is going strong and inflation is now the greater concern – he warned against “fiscal complacency.”

McGill University economist Chris Ragan said he didn’t think lopping $20-billion off the $100-billion recovery plan would have much of an impact on inflation, but there is still another reason to do it – because it would save $20-billion that is not needed for economic recovery.

The Liberals see that the other way around. If cutting back $20-billion won’t cool inflation, why do it? Inflation is still largely blamed on supply chain issues, and still forecast to be a problem that will ease in a year. They argue that many of the spending measures in their recovery plan are aimed either at green-economy transition or aiding vulnerable people who will need it more because of inflation, not less. Full speed ahead.

The Liberal approach to the national debt hasn’t really changed, either – even though it is now far higher than it was before the pandemic.

Before 2020, Mr. Trudeau’s Liberals argued there was room to spend because the ratio of the federal debt to the size of the economy, at roughly 30 per cent of GDP, was not increased significantly – so things were under control. After the massive pandemic deficits, the Liberals argue things will be fine because the debt ratio won’t go up in the future – only now, it is roughly 50 per cent of GDP.

They could, with better revenue figures, suddenly present a forecast for balancing the budget in coming years – disarming the Conservatives’ politically. But then they’d open themselves up to criticisms from the NDP that they are imposing austerity. And under Mr. Trudeau, the Liberals have leaned to competing with the NDP for voters. The Liberal approach to fiscal policy will still be the Liberal approach.

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Canadian dollar rises as selloff in U.S. bonds ebbs

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The Canadian dollar strengthened against the greenback on Thursday as U.S. bond yields stabilized and Ontario, Canada’s most populous province, said it would soon ease restrictions to curb the spread of the Omicron coronavirus variant.

The loonie was trading 0.3% higher at 1.2472 to the greenback, or 80.18 U.S. cents, after trading in a range of 1.2454 to 1.2516.

Among G10 currencies, only the Australian dollar notched a bigger gain. Both Canada and Australia are major producers of commodities.

“Interest rate differentials are tilting against the (U.S.)dollar, lifting the appeal of currencies leveraged to rest-of-world growth,” said Karl Schamotta, chief market strategist at Corpay.

U.S. Treasury yields have pulled back from 2-year highs as data showed that the number of Americans filing new claims for unemployment benefits unexpectedly rose last week.

Ontario has blunted transmission of the Omicron variant and it will gradually ease restrictions on businesses from end-January, Premier Doug Ford said.

Despite the prospect of slower economic growth due to restrictions, investors have raised bets that the Bank of Canada will hike interest rates on Jan. 26. It would be the first hike since October 2018.

Data from payroll services provider ADP showed that Canada added 19,200 jobs in December, the fifth straight month of gains

Canadian retail sales data, due on Friday, could offer more clues on the strength of the domestic economy.

The price of oil, one of Canada’s major exports, settled 0.1% lower at $86.90 a barrel as U.S. crude inventories rose for the first time in eight weeks and investors took profits after a recent rally.

Canadian government bond yields were mixed across a flatter curve. The 10-year eased 2.4 basis points to 1.857%, after touching on Wednesday its highest intraday level since March 2019 at 1.905%.

 

(Reporting by Fergal Smith; Editing by Jonathan Oatis and Sandra Maler)

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Toronto market hits 2-week low as rate hike angst weighs

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Canada’s main stock index on Thursday fell to its lowest level in more than two weeks as worries about the inflation outlook and prospects for higher interest rates weighed on investor sentiment.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 146.98 points, or 0.7%, at 21,058.18, its lowest closing level since Jan. 5.

“The non-stop inflation headlines, talk about interest rates have scared the market,” said Barry Schwartz, a portfolio manager at Baskin Financial Services.

Data on Wednesday showed that Canadian inflation climbed in December to a 30-year high.

Investors have raised bets on the Bank of Canada hiking interest rates at a policy announcement next week and are also concerned the Federal Reserve could become aggressive in controlling inflation.

The TSX gained 22% in 2021, its best yearly performance since 2009, supported by massive stimulus, vaccine rollouts and hopes of global economic recovery.

“The markets are deciding that the last few years people have made way too much money and it is time to give some of that back,” Schwartz said.

Broad-based gains included a 2.2% decline for consumer discretionary shares, while the basic materials group, which includes precious and base metals miners and fertilizer companies, ended 1.8% lower.

Energy was down 0.7% as an uptick in U.S. crude inventories arrested the recent move higher in oil prices. U.S. crude oil futures settled 0.1% lower at $86.90 a barrel.

Heavily weighted financials fell 0.4%.

Among 11 major sectors, utilities was the only one to end higher, gaining 0.2%.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; editing by Jonathan Oatis)

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Any sanctions on Russia would not widely impact global, U.S. economy -White House – National Post

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WASHINGTON — Any sanctions imposed on Russia over its aggression toward Ukraine would not particularly expose the U.S. economy, although the Biden administration is focused on any possible impact on oil, White House National Economic Council Director Brian Deese said on Thursday.

“The actions that we have ready and that we are working closely with our allies to deploy would impose very significant costs across time on the Russian economy, and it would do so in a way that mitigates the impact on the global economy and the American economy,” he told CNN. (Reporting by Susan Heavey Editing by Raissa Kasolowsky)

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