The Trudeau government goes into Monday’s election with momentum behind the prospects for economic growth and with the financial markets in a steady state.
As the Bank of Canada noted in its Sept. 8 assessment, “Financial conditions remain highly accommodative.” But will the unintended consequences of that accommodation turn on itself?
Our RSM Canada Financial Conditions Index is designed to show the level of accommodation in the financial sector, with positive values indicating a climate conducive for investment—which is essential for a growing economy.
Our index is showing that the level of risk priced into financial assets has been consistently lower than normal.
This is a good thing given the competitive election. The reduced level of risk is a testament to the Bank of Canada’s pre-emptive actions during the trade war and the pandemic to maintain public income streams and foster the quick recovery of household spending. These measures have contributed to well-behaved financial markets as the election approaches.
We anticipate no major reaction across asset classes because of the outcome of the election.
Despite the uncertain outcome of the election, accommodative financial conditions may also reflect the government policy consensus that exists across the main political parties.
All parties, even the Conservative Party, which has traditionally been fiscally prudent, have accepted a more interventionist and activist role for the federal government to support the recovery and address economic dislocations in the near term.
While there are some wide disagreements on how each party plans to pay for this spending, the federal government’s role in the economy is likely not going to change.
Not surprisingly, our financial conditions index implies that market participants are going to take the outcome of the election in stride. We anticipate no major reaction across asset classes because of the outcome of the election, which may take days or weeks to determine in any case.
Even with the resurgence of the manufacturing and consumer sectors, the Bank of Canada is aware of the pandemic’s disproportionate effect on low-wage earners.
The central bank has said that it will keep interest rates at extremely low levels for as long as slack remains in the economy. Arguably, however, these low interest rates are contributing to a housing crisis for low- to middle-income households.
So while financial conditions are far from being too exuberant, there are nonetheless consequences that need to be addressed by the fiscal authorities.
Suitable and affordable housing is as much a necessary condition for economic growth as the health and education of the labor force, and this has become an issue for the electorate.
The Bank of Canada recently noted that “housing market activity pulled back from recent high levels.” In addition, more than 85% of Canadians who are 12 or older have received at least one vaccination dose, with nearly 80% fully dosed, according to the COVID-19 Tracker Canada. One would suspect in the aggregate that these dynamics may result in a vote to maintain the status quo.
Still, as the central bank cautioned, “supply chain disruptions are restraining activity in some sectors, and rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery.”
We would add that the deceleration in commodity prices will have a negative effect on the Canadian dollar and gross domestic product should the pandemic continue to hurt global demand. In other words, it’s anybody’s race to win.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.