Canadian economy spared damage from U.S. fiscal cliff

OTTAWA – Canada has at least one less thing to worry about after its largest trading partner found a way to avoid the much-feared “fiscal cliff.”

Talks between Democrat and Republican politicians in the United States went down to the wire, but a deal was finally reached on New Year’s Eve, passed by the Senate that day, and by the House of Representatives on New Year’s Day. President Barack Obama is expected to sign it into law soon.

The compromise put a stop on hundreds of billions of dollars worth of tax increases and spending cuts that were kicking in Jan. 1, which economists feared would cause a recession that could have spilled into Canada.

Avery Shenfeld, chief economist for CIBC World Markets, said Canadian policy-makers are no doubt pleased with the turn of events.

“There’ll be a sigh of relief in Ottawa and at the Bank of Canada that they don’t have to completely reverse course,” Shenfeld said.

Mark Carney, who’ll be finishing off his stint as Bank of Canada governor before taking on the same role with the Bank of England this summer, might have been considering interest rate cuts to stimulate the economy if a fiscal cliff deal had not been reached, despite his expressed worries over rising household debt that comes largely as a result of already-low interest rates.

And the federal government might have seen its plans for deficit reduction thrown off track if economic realities demanded stimulus action as opposed to spending cuts.

Finance Minister Jim Flaherty issued a statement Wednesday saying: “Canada welcomes the agreement reached between the president and the Congress that protects the U.S. economy in the short term.

“That said, there remain a number of significant risks to the U.S. economic outlook. It is my hope that leaders in the United States continue to work together to develop future action that will put the U.S. fiscal position on a sustainable path.”

Flaherty added that the Canadian government “will continue to monitor all global economic situations carefully and stay focused on keeping Canada's economy strong. That means creating jobs, growth and long-term prosperity.”

There was no reaction Wednesday from the Bank of Canada on the U.S. fiscal deal, though officials there pointed to comments Carney made in Toronto last month, when he said, “if there were not to be a resolution of the fiscal cliff . . . the U.S. economy would go into recession and that would have a very direct impact on Canada. It would also have a material financial-market impact. And the combination of the two . . . might necessitate a policy reaction.”

Despite all the drama, Shenfeld said it was unlikely that U.S. politicians would not have come to some arrangement to save their own economy.

“We avoided something that was very unlikely to happen, which was that U.S. politicians would be so dysfunctional that they would drive the U.S. into recession, and take Canada along with it,” he said.

Still, Douglas Porter, deputy chief economist for BMO Capital Markets, said the U.S. resolution on the fiscal cliff is “quite significant” for Canada.

“We are highly dependent on the outlook for the U.S. economy, especially now given that most of our domestic drivers have cooled down or even stalled out,” Porter said, in reference to things such as Canada’s housing and consumer markets. “The thing that we need to take the Canadian economy to the next level is a more complete recovery in the U.S., and, frankly, the biggest risk to that U.S. recovery was this potential fiscal cliff.”

Porter said the idea of a “cliff” was misleading in that no immediate impact was anticipated with no deal in place by the new year. He said Jan. 1 was a “soft deadline,” and the economic effects from the automatic tax hikes and government spending reductions would be “accumulated” as the year progressed.

Stock markets would have suffered during the first few weeks of the year had the fiscal cliff threat not been put to rest, Porter said. Stocks in both Canada and the U.S. saw gains on Wednesday, the first trading day of 2013 and first since U.S. politicians reached a fiscal deal.

“I think (investors) would have been very concerned as of (Jan. 2) if we didn’t have a deal in hand, but I think that concern would’ve built through January and February as the effects accumulated,” Porter said.

While Porter said there are longer-term fiscal issues that U.S. policy-makers need to work out, he added that country is a long way from facing the kind of financial crisis seen in European countries such as Greece and Italy.

“I saw some U.S. congressmen talking about comparing the U.S. to Greece, and frankly, that’s ridiculous,” Porter said.

He said because of its dominant position in the world economy and the U.S. dollar’s role as an international reserve currency, the U.S. is “allowed a lot more leeway than almost anybody else” from credit markets. Porter added that since the U.S. has its own currency – unlike European countries that use the euro – it can set its own monetary policy to correspond to economic conditions.

“The U.S. can basically print money if need be,” Porter said. “And also, their currency can act as a bit of a safety valve; if investors were really concerned about the U.S. outlook, the U.S. dollar would depreciate, and that would make U.S. exports more competitive.”
 

http://www.globaltvedmonton.com/economy/6442780977/story.html

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