Getting caught in the Trump crossfire poses risks to Canadian
economy, dollar
TORONTO, Jan. 17, 2017 /CNW/ - While the outlook is for
firmer and more geographically balanced growth in 2017, the
Canadian economy faces major downside risks from the incoming Trump
administration's trade policies and Republican-backed corporate tax
reforms, finds a new report by CIBC Capital Markets.
These risks will impede the Bank of Canada's ability to tighten monetary policy,
the report says.
"We would need a huge and unlikely upside surprise to push the
Bank of Canada into a rate hike
this year," says Avery Shenfeld,
Chief Economist, CIBC. "Particularly since, the Trump
administration's trade-policy-by-Twitter and a Republican-backed
corporate tax reform plan biased against import content both
represent a major downside risk if Canada gets caught in the crossfire."
In that more negative scenario, Mr. Shenfeld expects the
Canadian dollar to come under pressure. "The shock to U.S.-bound
exports would engender a much steeper slide in the Canadian dollar,
well beyond 1.39 Canadian dollars per
U.S. dollar we expect to see on monetary policy differentials," he
says.
CIBC forecasts Canada's real
GDP growth at 1.8 per cent in 2017 and 2.0 per cent in 2018. "A
modest rebound in energy sector capital spending and ongoing oil
output gains will add a full percentage point to growth, a lot of
that showing up in Alberta's climb
out of recession," says Mr. Shenfeld.
The growth in the energy sector will offset the reduced
contribution from housing and consumption as an indebted household
sector faces higher inflation and a tighter in mortgage borrowing
conditions, the report says.
As for equity markets, Canadian stocks are unlikely to have the
same edge relative to U.S. stocks as they did in 2016. "It's not
what you know, but what you can't know at this juncture, that gives
food for thought for investment strategies," says Mr. Shenfeld.
"But, this could still be a wild ride for investors. There are some
significant skews to the risks around the bland base case."
Energy and gold prices look to be range-bound, with the former
constrained by inventories and rebounding U.S. drilling, while
industrial metals lack the sustained demand needed to build on the
prior year's gains."
U.S. stocks have already priced in a lot of good news, mostly on
the cost side, and Mr. Shenfeld says that if Trump delivers on
lower corporate taxes and a lighter regulatory burden, high-single
digit earnings growth looks achievable.
The report forecasts 2.3 per cent growth for the U.S. economy in
2017 and 2.1 per cent in 2018, noting that uncertainty is
"extremely high" surrounding Trump policies.
"Trump enters the Oval Office with a promise to Make America
Great Again, but the trouble is that America is pretty good
already," Mr. Shenfeld says. "We've lifted our US growth forecast
slightly for 2017, reflecting economic momentum already in place
more than any new policy developments. Wage and jobless data
suggest that slack is diminishing, with the US on target for full
employment by next year.
"We're also not sure that large scale fiscal stimulus is really
on the way, at least not on a sustained basis. Tea Party conservatives are likely to insist on
spending cuts to "pay" for tax reductions, and the infrastructure
plan is extremely modest in scale."
If such offsets aren't forthcoming, the result won't be faster
growth, but simply a steeper climb in Fed hikes to keep inflation
at bay, the report says. A situation with a greater fiscal ease in
the U.S, would prompt increases in borrowing requirements,
inflation and Fed hikes that will lift bond yields at a sharper
pace.
"For corporate Canada, the
instinct would be to judge a becalmed outlook as reason to eschew
active hedging for now. But the potential for a Trump in the night
bump suggests looking for opportunities to hedge against a pullback
in commodities, a weaker Canadian dollar, and a rise in long term
rates," Mr. Shenfeld says.
About CIBC
CIBC is a leading Canadian-based global
financial institution with 11 million personal banking and business
clients and three major business units – Retail and Business
Banking, Wealth Management and Capital Markets. CIBC Capital
Markets provides integrated global markets products and services,
investment banking advisory services, corporate banking, and
top-ranked research to corporate, government and institutional
clients around the world. Visit www.cibccm.com for more information
on CIBC and CIBC Capital Markets. News releases are available at
www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce