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Good Luck, Canada

In the aftermath of Justin Trudeau whopping defeat of conservative Stephen Harper, and the resurgence of liberal Canada, all we can say is: good luck Canada, you'll need it. From Reuters:

The US has seen that movie before, it's not a happy ending. Oh, and enjoy that AAA credit rating while it lasts.

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On a more serious note, here is the full post-mortem, pardon the pun, of the Canadian elections from Bank of America:

Liberals win with a majority of seats

The Liberal party won the Canadian election with an estimated 184 seats out of 338 (as this goes to print), ousting the ruling Conservatives. The Liberals were expected to win a minority of seats, so the majority victory comes as a surprise. Liberal leader Justin Trudeau will become the new Prime Minister, commanding the confidence of the majority of Parliament. The change of government should largely keep Canada’s business-friendly environment in tact: Liberals want to keep corporate taxes low, and the party supports the Trans-Pacific Partnership (TPP) free trade deal, as well as most major pipeline projects. However, a push for carbon and environmental regulation by the Liberal government could be negative for the energy sector.

Near-term uncertainty, medium-term small GDP boost

In the near-term, the change of government adds to policy uncertainty, especially as Justin Trudeau is an untested leader at the Federal level. However, over the medium term, the Liberals’ plan of running modest deficits for three years should be a small positive for the economic outlook. The GDP impact of the Liberals’ proposed spending plan is challenging to estimate, given uncertainties about multiplier effects. If we assume a multiplier range of 0.5 to 2.0 (a 0.5 multiplier means $1 of spending adds 50 cents to GDP), the Liberals’ announced deficits of just under $10bn/year could add 0.1pp-0.3pp to GDP growth in 2016 and 0.1pp-0.5pp to GDP growth in 2017. Greater government spending will, on the margin, reduce the need for monetary policy easing.

Limited risks of fiscal deterioration

Canada’s sovereign credit rating, currently AAA, depends on a number of factors, including economic activity, commodity prices and fiscal discipline. We see limited risks of a notable deterioration in fiscal health resulting from the Liberal victory:

  • On October 14th, ratings agency Moody’s published a note that the election was unlikely to change the creditworthiness of the federal government, regardless of which party wins the election.
  • The Liberal plan for deficits of around 0.5% of GDP is modest. Also, the plan is to end deficits by 2019, suggesting only a temporary period of higher spending.

With a majority of seats, we think it should be relatively straightforward for Liberals to implement their platform: there is no need to court votes from other parties to pass the budget, as would be the case under a minority government. Thus, we see less risk of fiscal slippage and less uncertainty in budgetary implementation.

Next steps

Although the House of Commons is technically scheduled to open in late November, we think it is more likely that the House returns in late January 2016, allowing time for new Liberal ministers to be sworn in and learn their files. To open the new session, Prime Minister, Justin Trudeau will deliver the Throne Speech, outlining the government’s goals. Throne Speech is a confidence motion, but since the Liberals have a Parliamentary majority, the speech will pass. The budget will likely be released in the spring of 2016, with implementation likely starting in the summer.