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Canada, U.S. not headed for recession, but it’s really up to Trump: Scotiabank

U.S. President Donald Trump speaks to reporters at the White House in Washington, U.S. October 9, 2019.  REUTERS/Jonathan Ernst
U.S. President Donald Trump speaks to reporters at the White House in Washington, U.S. October 9, 2019. REUTERS/Jonathan Ernst

Canada and the United States are headed for slower growth, not a full-blown recession. But more Trump-fuelled global drama could change that in an instant.

That’s among the takeaways in an economic outlook report from Scotiabank titled “A Most Uncertain World.” Chief economist Jean-François Perrault holds the U.S. President’s trade policies and a “raft of other Trump-related developments” responsible for the current pull-back in global business spending and confidence.

“Growth is a victim of the China-U.S. trade war,” he wrote in the report, which calls for uncertainty to rise through 2020 before gradually abating in 2021. “This view assumes that President Trump will seek some degree of stability in the lead-up to the 2020 Presidential election.”

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Trump is set to meet with China’s negotiating team led by vice-premier Liu He at the White House on Friday. It’s the thirteenth round of trade talks between representatives of the world’s two largest economies.

U.S.-China relations have been increasingly strained in recent weeks, exacerbated by a tweet from an NBA general manager in support of Hong Kong’s pro-democracy movement, and new U.S. sanctions over China’s human rights record.

Perrault notes the protracted trade spat is having a measurable impact on the American and Canadian economies.

“We have formally included measures of uncertainty in our macro models for the U.S. and Canada, and find clear evidence that the rise in uncertainty under President Trump has reduced U.S. and Canadian output by 0.75 and 0.5 percentage points through 2019, with that impact expected to increase through 2020,” he wrote.

“Growth will slow in both countries given the weight of uncertainty to date, as can be seen in PMIs (Purchasing Managers' Index), but there are no imbalances large enough in either economy that could lead to a recession.”

‘Hiring boom’ helping Canada

While problems beyond Canada’s borders weigh on the nation’s economy, rising wages at home and an unemployment rate near a 45-year low are cause for cautious optimism. Perrault said the resounding strength of the labour market has been the most surprising Canadian economic development of the past year, especially given the retrenchment in global industrial production and trade volumes.

“More jobs have been created as of August than in all of 2018,” he wrote. “The strength in confidence, which is itself a reflection of underlying dynamism in the labour market, is keeping a lid on recession risks thus far.”

That said, Perrault sees the uncertain global trade picture taking a “heavy toll” on the Canadian economy. In the event of a technical recession, he said central banks including the Bank of Canada may consider rate cuts and stimulus measures.

“Negative interest rates may be possible,” he wrote. “The good news in all of this is that we still think it is relatively easy for President Trump to reverse some of the damage he has so far caused. We’re crossing our fingers and hoping that President Trump, in his ‘great and unmatched wisdom,’ sees things our way.”

Yahoo Finance Canada
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