The Bank of Canada flagged potential risks to the Canadian economy from flailing NAFTA negotiations and the ongoing trade dispute between U.S. aircraft giant Boeing and Canada’s Bombardier.
“A protectionist shift in the United States is already evident in several discretionary decisions,” the bank wrote in its quarterly monetary policy report.
The bank released its economic scorecard on Wednesday, when it also announced it would keep its key interest rate steady at 1 per cent.
READ MORE: Bank of Canada keeps key interest rate on hold at 1%
The potential for protectionist policies in the U.S. was “front and center” in the report, noted TD economist Brian DePratto.
As an example of such policies, the bank mentioned the imposition of countervailing duties “on Canadian aircraft,” a clear reference to the Boeing-Bombardier case.
Earlier this month, Washington approved proposed duties of around 300 per cent on Bombardier, following a trade dispute initiated by rival Boeing, which argues that the government aid Bombardier received for the C-Series amounts to unfair competition.
READ MORE: Bombardier got subsidies? Boeing received $64B from the U.S. government
The bank also called the uncertainty surrounding NAFTA negotiations “elevated.”
READ MORE: What if NAFTA ended? These would be Canada’s hardest-hit provinces, industries
Indeed, the fate of NAFTA talks has likely become a factor that will “critically” influence the timing of the bank’s next interest rate hike, wrote BMO chief economist Douglas Porter.
BMO pushed back its forecast for the next rate hike from January to March following Wednesday’s comments by the bank.
This might include the risk of Canadian businesses expanding their production in the U.S. in order to circumvent U.S. protectionist measures.
Skirting around rising U.S. trade barriers by relocating production to the U.S. is what Bombardier might be aiming for with its recent partnership with European aircraft behemoth Airbus. The deal will likely allow Bombardier to sell the C-Series to U.S. airlines without incurring trade duties by producing the plane at Airbus’ manufacturing plant in Alabama.
WATCH: Trump touts ‘reciprocal deals’ as fears U.S. could retreat from NAFTA mount
Trump tax cuts, on the other hand, might be a boon for Canada
There’s another side of U.S. policy, however, that might benefit Canada, according to the Bank of Canada’s report.
“Efforts toward deregulation and prospects for sizable federal corporate and personal tax cuts in the United States could boost U.S. economic growth,” the bank wrote.
More spending by U.S. consumers, firms and public entities, in turn, would have “positive spillovers for Canadian business confidence, investment and exports.”
WATCH: Trump unveils massive tax cuts – but do they help, or harm the middle class?
Canadian economy on an upward trajectory, despite U.S. worries
Despite its concern about trade with the U.S., the bank upped its forecast for the Canadian economy. Growth for 2017 is now expected to come in at 3.1 per cent, compared to a projection of 2.8 per cent growth in July.
The bank decided not to incorporate the risk of a significant U.S. protectionist shift in its economic projections, Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins noted in a statement accompanying the monetary policy report.
For 2018 and 2019, the bank expects growth of 2.1 per cent and 1.5 per cent respectively, as the economy gradually slows down from its current pace.
Reflecting a healthy economy, inflation is forecasted to increase to close to the bank’s target of 2 per cent over the course of 2018 and to remain around 2 per cent throughout 2019.
Once again, the bank highlighted the housing market as a potential domestic vulnerability, saying the Toronto and Vancouver markets remain an important risk factor.
A significant decline in housing prices could have a palpable negative impact on those regions, with limited spillover effects in the rest of Canada.
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