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Canada: USMCA won’t be a huge game changer for growth – CIBC

According to analysts at CIBC, the deal announced between the US and Canada won’t be a significant game changer regarding Canadian growth and it paves the way for a rate hike in October.  

Key Quotes:  

“Relative to the status quo before the trade front fell into dispute, the deal won’t be a huge game changer for Canadian growth, given the country’s poor track record in advancing either export volumes or non-energy industrial capacity since 2000.”

“In what will now be called the United States Mexico Canada Agreement (USMCA), the biggest wins for Canada are avoiding punitive auto tariffs and the preservation of the chapter 19 dispute resolution mechanism. Other key wins for the Canadian side were in the US agreeing to drop a troublesome demand for a sharp reduction in access to American government procurement contracts, and the US agreement to at least a 16-year term with highly likely extensions ahead.”

“One notable concession was to dairy supply management which will be loosened to enable US exporters to have better access to Canadian consumers.”

“No deal was reached to remove the recent US-imposed aluminum and steel tariffs, or the retaliatory tariffs imposed by Canada.”

“Note that we had already assumed a resolution to NAFTA disputes would be reached by October so our base case forecast doesn’t change. The deal paves the way for a rate hike by the Bank of Canada this month, and a follow-up move that we now see coming in January.”

“Real exports from the US are up 75% from 2000 levels, but Canadian real exports have seen little growth over the same period. Keeping the Canadian dollar range-bound or even weaker will be a necessary condition over the medium term to turn that around. That should still see the Bank of Canada trail the Fed, hiking only 50 bps in total in the next few quarters. Look for the Canadian dollar to return to the low 1.30 range in 2019 as the BoC is outgunned by the Fed.”
 

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