More government, less hikes?

It’s hard to remain optimistic about Canada’s economy.  We have just posted the strongest growth in the industrialized world but it now looks like our elected officials want to snatch defeat from the jaws of victory.  For political reasons, governments seem to have shifted from ensuring economic growth to ensuring fairness.  After the great run of numbers we just had, most people would want to keep that momentum going.  Sometimes that may mean not rocking the boat and doing nothing.  Unfortunately the words “do nothing” are not in the vocabulary of our political elite unless you are talking about energy infrastructure projects.    

After the surge in growth that we have had, one would expect to see the numbers endogenously soften.  But in addition to this natural slowing, and in the name of helping the middle class, the domestic economy will be expected to shoulder a higher minimum wage in some provinces, a new tax on the small businesses, tighter regulations on non-insured mortgages, and fall-out from the Nafta negotiations that presently appear to be falling apart.  At this stage, it looks like all these measures will be hitting the economy around the same time.  This is on top of current regulations involving the environment that makes it virtually impossible to move forward on any infrastructure project.  Maybe the fact that we are at or near full employment gives the government some room to apply the fiscal and regulatory brakes, but for much of their agenda, they have no clue as to the ultimate impact their new policies will have on the economy, either directly or indirectly.  Consultations that were held with stakeholders on the wage hike, the new tax regime and the mortgage revamp were pretty clear that the first and second round economic consequences may be more negative than expected and there was concern voiced about unintended consequences.  Unfortunately the experts’ concerns fell on deaf ears as both the government and OFSI seem determined to forge ahead with a few possible minor tweaks.  These folks that voiced the possible negative effects obviously had vested interests in the status quo.  You can’t fool our political elite who refuse to let facts get in the way of a good political story.  

So with the governments determined to “rain” on the economic parade (and we haven’t even mentioned present and future hydro rates in the most populated province), how is the central bank suppose to incorporate these measures into their forecast of aggregate demand and longer-term potential growth at the upcoming MPR?  

For the most part, they won’t.  Unless it has been announced as official policy and estimates have been produced by the respective governments as to their impact on the economy and their deficits well before October 25, these overhanging items will not be addressed in the outlook.  This means that the impact of the hikes to minimum wages will be imbedded in the forecast, but nothing else.   

The Bank may make mention about these potential measures in the risks to the inflation outlook, but I doubt it.

Something to keep in mind when we get to look at the economic growth outlook produced for the upcoming MPR and start conjuring up a profile for the target interest rate.