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Canada Politics Q4 2019

Canada: Trudeau loses majority but clings to power; economic impact expected to be limited

Prime Minister Justin Trudeau’s Liberal Party came out on top in a tight election race on 21 October, winning the most seats despite losing the popular vote to the opposition Conservative Party. The Liberals won 157 of 338 seats in the House of Commons, falling short of the 170 needed to keep their majority; the Conservatives came in second, clinching 121 seats. Trudeau is now expected to form a minority government and seek support from different parties on an issue-by-issue basis to pass legislation. Economically, the loss of a majority should not have a meaningful impact. Historically, minority governments in Canada have had success in passing legislation through consensus-building and given relatively similar views between parties, although they typically have a shorter life-span than majority governments.

The Liberal’s platform is partly a continuation of current objectives, pledging to fight climate change and support middle-class Canadians. The party is seeking to reach net-zero carbon emissions by approximately 2050; however, in spite of stricter climate goals, the government is planning to expand the Trans Mountain pipeline, which should support the country’s struggling oil industry. In addition, they have pledged tax reductions, particularly aimed at low- and middle-income households. Among the measures, they plan to raise the taxable income threshold to CAD 15,000 per year for most Canadians and tackle housing affordability by introducing further subsidies for first-time home buyers. Spending should be partly offset by new measures, including increased tax revenues from the pipeline, limiting corporate tax loopholes and higher taxes on non-resident home owners. Overall, the federal stance should remain slightly expansionary.

In recent months, the Liberal government has garnered support on the back of strong economic data, with second-quarter economic growth hitting a two-year high under their watch. Moreover, the labor market remains rock-solid while credit conditions have improved in recent months, which should support household spending ahead. Looking ahead, the expected ratification of USMCA and the extension of the Trans Mountain pipeline should boost the economy, with the former supporting business confidence and the latter providing stability to Canada’s all-important energy sector. The uncertain global economic environment and subdued commodities prices pose threats to the outlook, however.

FocusEconomics panelists see the economy growing 1.6% in 2020, which is up 0.1 percentage points from last month’s projection, and 1.6% again in 2021. In terms of the fiscal balance, our panel expects a fiscal deficit of 0.9% in 2020, before narrowing slightly to 0.8% in 2021.

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