As of Jan. 1, 2012, Canada’s corporate tax rate–federal plus provincial, combined–is 25 percent. That’s the lowest among Group of Seven (G-7) members and one reason Forbes labeled the Great White North the No. 1 place in the world to do business.
Many investors will never forgive Prime Minister Stephen Harper or faithful lieutenant and Finance Minister Jim Flaherty for their roles in the Oct. 31, 2006, Halloween Massacre that wiped out about CAD20 billion of wealth. But those two, along with the man who blueprinted the policy to begin taxing income trusts while toiling anonymously at Finance, the sitting governor of the Bank of Canada, Mark Carney, have shepherded Canada to an enviable perch in the early aftermath of the Great Financial Crisis.
In May 2011 Canadians rewarded Mr. Harper, who had previously led his Conservative Party to two plurality wins and had headed minority governments, his long-coveted majority victory. He no longer needs help from another party to pass legislation, and he won’t face another election until October 2015.
That’ll come as some relief for Canadians who’ve trudged to the polls three times since 2004. It’ll also give his government plenty of opportunity to fulfill its promise to bring Canada’s budget back into balance by mid-decade. At the same time, however, Mr. Harper and Mr. Flaherty have consistently adjusted projections and spending plans to fit Canada’s growth trajectory, as described by Mr. Carney is his commentary accompanying regular interest rate decisions as well as in the BoC’s quarterly Monetary Policy Report.
By the time Lehman Brothers imploded in the fall of 2008, kicking off a credit crunch that led to the deepest economic downturn since the Great Depression, Canada had already experienced a reckoning of sorts, having put together a decade’s worth of balanced budgets since being declared an honorary member of the third world in the mid-1990s by a prominent Wall Street Journal columnist.
That left the Canadian federal government with plenty of room to fund public projects once, for example, Ontario’s auto industry seized up or Alberta’s oil sands growth stalled. Ten years of balanced budgets, accomplished by Liberal and Conservative governments, with help from all of Canada’s major parties, establishes plenty of credibility to underlie promises to return to balance as soon as economic conditions dictate.
Mr. Harper and the Conservatives are now the subject of articles questioning whether they’ve replaced the Liberals as Canada’s “natural governing party,” think-pieces rooted in the shift of the country’s economic center toward the west and its copious resources. And though the Liberals have bounced back a bit from the historic depths to which voters took them during the May 2011 election, they still trail not only the Conservatives, who’ve held onto much of their support, but also the upstart New Democratic Party, even after the tragic death of the NDP’s charismatic leader Jack Layton.
The Canadian financial system continues to earn praise around the world for conservative practices. The Big Six and Canada’s other banks have been ranked the world’s soundest for four straight years by the World Economic Forum. Fiscal 2011 fourth-quarter (ended Oct. 31, 2011) earnings for the group were up 34 percent to CAD6.4 billion, despite narrowing interest margins and generally weak financial markets in the second half of the year, as consumer and business loan growth remained solid. Economic and employment growth in Canada has kept the country’s housing market afloat and consumer confidence stable.
The primary threats to the system and to Canada’s economy generally in 2012, as Mr. Carney noted in the BoC’s December 2011 Financial System Review, come from abroad, notably Europe. Although Canadian banks don’t have significant exposure to European debt, a collapse of financial systems on the Continent would reverberate around the world in the form of slowing economies and rising jobless numbers.
The BoC warns that “a sharp and persistent increase in the unemployment rate would reduce aggregate income growth and make it more difficult for some households to make their debt payments. It would also have adverse knock-on effects on consumer confidence, the housing market and Canadian household net worth.”
Mr. Carney has been able to respond to weakening economic conditions with rate cuts that took the BoC’s target to an all-time low of 0.25 percent from April 2009 to June 2010. The BoC target is back to 1 percent, which leaves the central bank room to cut again if conditions warrant. But Canadians have responded to the BoC’s cuts by taking on more and more debt, their jobs seemingly more secure and their houses preserving more value than their international peers’. He’s loath to encourage even more debt-taking by engaging in another round of cuts. Canada has taken steps to tighten lending standards in order to restrain the growth of a housing bubble and reduce the potential threat of another global credit crunch, but elevated levels of household debt–Canadians have had a higher debt-to-income ratio than Americans since the start of 2011–and historically high housing prices leave the Great White North exposed should things turn south in Europe.
The political situation immediately to its south couldn’t be more different than it is in Canada. Republicans are engaged in a struggle that might weaken the victor too much to mount a serious challenge to even a vulnerable President Obama. And the administration has basically called the “four corners” play for all major departments and agencies with business that could arouse electorally important constituencies, meaning it’s trying to delay major decisions until after Nov. 6.
Washington gamesmanship has already put TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL project in jeopardy once more, as the final bill extending temporary payroll tax cuts also included a measure insisted upon by House GOP members that requires a decision by the administration by the end of February. Odds favored US government sanction in early 2013, by a reelected President Obama or by is Republican successor.
Forcing the president out of his favored strategy will likely result in a crafty, lawyered-up response that rests on the need to review the project anew in light of Nebraska state legislators’ and TransCanada’s agreement to reroute the project away from the Ogallala Aquifer. The Obama administration has to pacify union members hungry for the jobs promised by Keystone XL as well as environmentalists driven to accelerate oil’s demise, so it will.
Beyond the North Atlantic, prominent threats to global stability, economic and political, include China and Iran.
Questions persist about the Middle Kingdom’s ability to maintain its torrid, double-digit expansion of recent years. It’s not likely to post 10 percent-plus figures again, but China is on course to growth by more than 8 percent in 2012. Our base-case scenario, arrived at in consultation with our colleague Yiannis Mostrous, is that Chinese officials will do what it takes to guarantee a soft landing for the Middle Kingdom. They have several tools at their disposal, including further easing of bank reserve requirements.
Iran and the threat it represents to the Strait of Hormuz, through which about a third of the world’s daily seaborne shipments of oil pass, is a wildcard. In the short term, it will contribute to elevated oil prices and the persistence of the strong-terms-of-trade dynamic that has buoyed the Canadian dollar and Canadians’ relative wealth over the past half-decade. Should it flower into something more–something that actually reduces daily supply, even as much as was removed during the initial stages of the Libya uprising–there will be a drag on global growth.
As has been the case since 2007, however, Canada is able to respond to whatever threats emerge from Europe, the US or beyond, via fiscal and monetary policy. Mr. Harper, Mr. Flaherty and Mr. Carney can’t control how policymakers across the Atlantic, its southern border or the world behave. This is no “committee to save the world.” We, and Canadians, are happy that they manage Canada relatively well.
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