Canada introduces 5-year fiscal stimulus plans

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Image via Bank of Canada / Flickr

The first budget from the newly elected Liberal government was released yesterday which included a much talked about the fiscal stimulus package to revive growth focusing on infrastructure spending and tax reliefs but cautioning that it would run a budget deficit almost triple than what was promised in the election last year. The fiscal stimulus spending is expected to run for a period of 5-years.

Introducing a C$47 billion stimulus package, the finance minister Bill Morneau said that the fiscal stimulus would help in boosting Canadian GDP by 0.50% in 2016 and advancing to 1.0% in 2017. The government currently expects 1.40% GDP growth this year and a 2.20% GDP increase in 2017. Promising to break with its G7 peers by countering slow growth with fiscal spending rather than austerity, the Justin Trudeau government said that infrastructure project spending would be the focus including upgrading Canada’s public transit system.

Finance Minister, Bill Morneau said that they were investing in the people and the economy to prepare Canada for a brighter future. He also said that if the stimulus plans generated growth as forecasted; the budget would be balanced within five years.

The fiscal stimulus spending is likely to see the Bank of Canada stand pat on policy at its next sitting in April. Earlier in March, the BoC held rates steady and struck a neutral tone, but noting that it would wait for details of the fiscal stimulus spending package from the Government.

The budget, however, received mixed responses, both from the opposition as well as analysts. While the Royal Bank of Canada expects a higher deficit to be positive for the Canadian Dollar, others such as Capital Economics’ David Madani expect that the stimulus spending of C$47 billion is modest at best, compared to the country’s flagging economy with most of the spending going into slow-moving infrastructure projects.

He expects the Bank of Canada to deliver another 25bps rate cut by mid-2016, bringing the lending rates from 0.50% to 0.25%. He also expects that Canadian GDP could grow at 0.70% rather than the government’s projected 1.40% in 2016.

The Canadian dollar did not react much to the news, as USDCAD is now down -10.54% with 9 consecutive weeks of declines, following the early January test to the highs of 1.4534. On a year to date basis, the Canadian dollar is the second best-performing currency, only next to the Yen with the biggest jump coming against the British Pound.

USDCAD is currently trading at 1.308, following a brief test to 1.30 on 17th and 18th of March. To the upside, resistance comes in at 1.3262 – 1.3226 above which sits the major resistance level at 1.34. To the downside, below 1.30, the next main support level is at 1.285.

USDCAD - Daily Chart, 23/03
USDCAD – Daily Chart, 23/03


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