10th April 2018 

30th April has come around again, closing the door on a strong year of growth and ushering the country into a new and somewhat uncertain future. One variable that will be watched with close interest is the extent to which Canadian businesses will move south of the border to take advantage of low US corporate tax rates.

The full effect of Washington’s decision to enact new business-friendly tax laws is yet to be seen, but according to some, it is already pulling investment capital away from Canada and into the US. The situation creates a conundrum for Canadian economic planners: whether to follow the US down this path to stem the tide of departing investment money, or hold its course in hopes that Canada’s system is more stable in the long run.

Several other factors compound the situation. Canada’s trade deficit grew to $2.7 billion in February, significantly higher than estimates. NAFTA’s potential renegotiation, as well as the threat of a US-China trade war, leave open the possibility of consequences that few can accurately foresee.

In some ways, Canada stands poised to benefit from any increase in trade tensions between the US and China. As an alternate supplier of goods, US exporters’ loss could be Canadian exporters’ gain. A separate danger underlies the entire ordeal, however. If increased protectionism slows down economic activity as a whole, either through escalating maneuvers or through other countries becoming involved, then the resulting slowdown would be negative for nearly everybody, Canada included. With neither side of the US-China showdown eager to blink, these two economic powerhouses have the potential to massively destabilize current trade activity in scores of countries.

For these reasons among others, Canada is showing a rather unsettlingly high score on the Economic Policy Uncertainty Index, a data analysis compiled by a group of economists at three major US universities. For all the discussion about the disruption to US society following the election of Donald Trump in 2016, the relevant data currently shows a dramatically higher ‘uncertainty’ score for Canada than for the US.

Beyond the reasons listed above, Canada has other unaddressed issues that contribute to the general lack of clarity about its economic future. One of these is the skepticism within the energy industry that its new pipelines will receive federal government approval. Another is the string of regional deficits being run up by governments across the Canada, without a clear plan to bring back fiscal responsibility. A third is the question of how Canada will set its interest rates moving forward. Each of these issues, and many others, creates just enough uncertainty in the markets to convince many businesses and investors to wait and see what will happen rather than make strong and positive steps forward.

All of these issues could very well turn out in Canada’s favor, but the uncertainties themselves inspire caution for the time being. With political scandals south of the border, Brexit in Europe and a world unsure of what era we are beginning to enter, caution may be the most sensible choice for individual businesses looking to plan ahead – until governments like Canada’s take decisive steps forward into safe territory.

 

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