We’re on the brink of a trade war with the United States, so this might cause some cognitive dissonance, but Canadian companies might be getting used to President Donald Trump.
The banner headline from Ottawa on Thursday was Prime Minister Justin Trudeau’s decision to retaliate against the Trump administration’s application of tariffs on imports of Canadian aluminum and steel.
Trudeau and Foreign Affairs Minister Chrystia Freeland held a press conference to announce that Canada will tax American steel and other imports, worth more than $16 billion starting July 1, unless Trump relents. Mexico and the European Union also promised retaliatory duties, portending a global trade fight of a magnitude that hasn’t been seen in decades. Stock markets fell and Canada’s dollar slumped.
All of this was a shame because the day started with some good news.
Statistics Canada reported that the economy grew at an annual rate of 1.3 per cent in the first quarter. Nothing special about that figure, which was in line with the Bank of Canada’s forecast and slower than many on Bay Street had foreseen.
But the significant data was below the surface. Business investment in machinery and equipment rose 4.2 per cent in the first quarter, one of the biggest gains over the past couple of decades. And spending on intellectual property, which contracted in 2016 and had been lacklustre since, surged 3.3 per cent over the first three months of the year, the largest quarterly increase since early 2011.
These numbers matter because they show that companies are expanding to take advantage of the strongest global economic growth since before the Great Recession. Other data indicate that Canadian industry essentially is running its existing facilities and staffs to their max, which probably is one of the reasons that exports have disappointed: companies simply lacked the capacity to keep up with demand, nevermind increase market share.
Investing to win new business might seem a natural thing for a company to do, but there was lots of worry in Ottawa that Trump had scared Canadian executives stiff.
Anecdotal evidence suggests some companies have put expansions on hold while Canada, the U.S. and Mexico renegotiate the North American Free Trade Agreement. The Bank of Canada worried that sentiment could be widespread. It resisted raising interest rates because its models indicated that investment should be higher, given the strength of global economic growth. The central bank left borrowing costs unchanged for a third consecutive time on May 30, mostly because of uncertainty over trade policy.
Bank of Canada Governor Stephen Poloz and his advisers on the Governing Council made that decision without getting to see the first-quarter GDP numbers. But they have seen the data now, and they appear to like them.
“We expect business investment to increase, but not by as much as it could without this uncertainty,” Bank of Canada Deputy Governor Sylvain Leduc told an audience in Quebec City on May 31. “That said, business sentiment and investment intentions remain positive, suggesting that firms are getting on with business and adjusting to this more volatile environment.”
Leduc was delivering the Bank of Canada’s second economic “progress report,” a new feature of the institution’s communications strategy that’s meant to ensure every policy decision comes with context and explanation.
Policymakers opted to leave the benchmark interest rate at 1.25 per cent this week, but they wrote the policy statement in a way that made clear they are ready to resume raising interest rate at their next scheduled decision on July 11. The central bank dropped a reference to needing to be cautious and said it would lift borrowing costs gradually, depending on the incoming data. It also said that it already was feeling better about investment, noting that a jump in imports of machinery and equipment signalled buoyant business confidence.
Leduc spoke before Trudeau and Freeland announced their plans to retaliate. At a press conference, he said it was too soon to predict what the U.S. tariffs would mean for the economy, although he did offer that the effect probably would be negative. “Those measures are not the type of measures that are conducive to a good environment,” Leduc said. “We’ll have to see how it breaks in the data.”
The central bank also will be paying close attention to the housing market for guidance on how the economy is coping with previous interest-rate increases, as well as to hiring data for evidence that wages are rising and marginalized workers are finding jobs.
“Wages are rising somewhat more slowly than we would expect to see in an economy operating at capacity,” Leduc said in his progress report. “This may indicate that some slack remains.”
But it’s noteworthy that business investment no longer features among the central bank’s primary concerns. A protracted trade war could change that, but for now, the data suggest Canadian companies are getting back to business.
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