Des spécialistes de BMO discutent des résultats des élections canadiennes

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Speaker 1:
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Speaker 2:
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Scott Brison:
Good day. And welcome to the day after the Canadian election. We were all ... Canadians, we're all enjoying a peaceful summer, in mid-August, in Canada, listening to the loons, cooking the hot dogs and marshmallows on the fire, and barbecuing with family, when suddenly, a federal election was thrust on us by a prime minister, Prime Minister Justin Trudeau, who riding high in the polls, based on large level of, or a high level of public support for his government's handling of COVID, had great confidence entering the election. It was sunny ways and sunny days. What could go wrong?

Scott Brison:
In fact, quite a few things could go wrong on the way to election day in Canada in 2021. To help us sort through not just some of the political analysis, but more importantly, the economic analysis in terms of this call today, and the impact on the future of the Canadian economy, and on your wallet, and your family's financial well-being, we're joined today by two real experts from BMO Financial Group. We have with us today Doug Porter, who is chief economist for BMO Financial Group. And we're also joined by Earl Davis, who is head of fixed income for BMO Global Asset Management. My name is Scott Brison. I am vice chair of BMO Capital Markets. I'm delighted to join you today and to help kick off this discussion.

Scott Brison:
I know a little bit about politics having been elected seven times in the magnificent riding of Kings-Hants in Annapolis Valley of Nova Scotia, twice as a Progressive Conservative and five times as a liberal. So you could argue that I have more than one partisan lens to view some of these events. I will very briefly review some of the political side of this, but recognizing there's an awful lot of analysis out there the day after. We will quickly shift into the economic impact of the decisions Canadian citizens have made in this election.

Scott Brison:
First of all, in terms of my background, I served in Paul Martin's liberal cabinet. I also served in Prime Minister Trudeau's liberal cabinet and economic portfolios and in opposition over the year for the number of economic portfolios. And one of the things that having noticed in this election is a real shift in economic priorities. We'll get back to that in a moment. When the election was initially called, the prime minister, I think in the first week, the government had struggled to explain the rationale for the election.

Scott Brison:
That stuck longer than it sometimes does in these types of election scenarios, but the government did struggle for awhile at the time. And as well, I would say in the first week or so of the election, new, relatively new Conservative leader, Aaron O'Toole, was putting forward a moderate progressive face on his leadership, working quite hard to reposition the Conservative party to a more centrist perspective. I think he was getting some traction at that point. But what the criticism always is that there is a hidden agenda. That's the accusation on certain issues, whether it is assault rifles or on other social issues.

Scott Brison:
In this case, it wasn't really a hidden agenda. Right in the platform was the commitment to repealing the ban on assault rifles. Now, Aaron O'Toole, Conservative leader, did struggle with that for a period. But I do believe that that was a bit of a turning point in terms of having inflicted some damage on his positioning as a centrist. Beyond that, I would also say that Prime Minister Trudeau and the Liberals intended to go into this election I think depending on receiving a lot of support from Canadians in recognition of the government's performance on COVID. That is the same kind of expectation that Winston Churchill had in 1945 when he entered the election against Clement Attlee a few months after he had won the second World War defending the free world.

Scott Brison:
And ultimately, people voted for Clement Attlee because he had a plan for social housing. And the lesson there is that people don't really vote based on what you've already done for them. They tend to vote based on what they expect you to do for them next. Voters were also noticeably cranky in this election, and we saw I think a level of demonstration and protest and a fairly ugly side to this election, generated in part by the anti-vaccination forces. But there was a discerning or a discernible crankiness to this election.

Scott Brison:
And later in the election, another turning point I believe from the Conservative's perspective that was damaging was the Alberta COVID situation. As that erupted, it made it very uncomfortable for Aaron O'Toole. Jason Kenney had been a significant supporter, helping Aaron O'Toole win the Conservative leadership. The challenge in this case was that Premier Kenney's record on COVID was in the spotlight unfavorably during a serious ... Well, a real COVID crisis during the election, which helped renew fears of COVID, and bringing back the discussion somewhat to the Liberal's  which was back to COVID. So I think that played a role as well.

Scott Brison:
One thing before, mentioning the Conservative movement and the very significant focus that the leader put on getting his party into the center, or trying to get his party into the center in this election, he was fighting on two fronts. Aaron O'Toole was fighting, of course, for the votes of the general electorate and trying to move his party to the center on social issues. But then he was also fighting within his own party against some of the elements of the Old Reform party. And in addition to that, this new political force, led by Maxime Barnier, second election but a significant bump in percentage of the popular vote for the People's Party of Canada.

Scott Brison:
Some reports are that seven or potentially eight seats could have been won had the People's Party of Canada not siphoned off votes from Conservatives in tight ridings. But it does speak to a challenge that the Conservative party faces now, and one of the real challenges on an ongoing basis that plagues Conservatives movements in Canada is that the right hand doesn't always know what the far right hand is doing. And we will see how that plays out in this parliament and in Conservative leadership politics in the coming days.

Scott Brison:
One thing ... So one point I'd like to make is that there seems to be, and I'm going to turn this over to Doug and Earl in a moment. But there seems to be a bit of a shift in how Canadians view the economy, and a shift to what would be described traditionally as to the left on some of the big economic questions. Back in ... Well, in the late 90s and the early 2000s, when Jean Chrétien and Paul Martin were paying down the deficit and eliminating deficits and paying down debt and cutting taxes, the NDP were only at 9% or 10% at that time. Today, we have a federal liberal government under the leadership of Prime Minister Trudeau, whose tax policy and spending policy is certainly different from Paul Martin and Jean Chrétien governments, and one could argue is much closer to the space typically occupied by NDP on economic matters.

Scott Brison:
Yet at the same time, the NDP are at around 18%. So if you combine federal liberal and NDP popular vote, you've got 50% of Canadians having voted for parties with very much a free spending approach to the fiscal management of our country. And I'd like to turn this over, and I'm going to start with Doug. One of the positive things that I think a lot of us saw in the campaign, and it's important to try to identify some positive things in these situations, was that most Canadians voted for, in fact all political parties, I think except for the PPC, actually had plans, serious plans on the environment and carbon pricing. So there seems to be a consensus on what we could be doing for the future of the planet.

Scott Brison:
To hear more about this election's impact on the future of your wallet, and the likely economic policy decisions resulting from this election scenario, I'm going to turn things over to Doug and Earl. And I'll start off with Doug. Doug, for Canadians watching this, many of us would have liked to have seen a more robust discussion on the economy, on things like spending, and fiscal policy, and growth policy, and tax policy, in a more fulsome way during this election. We didn't see a lot of that, so looking at the proposals brought forth by parties in the election, and the result of the election, what do you expect to see the policy mix in the coming weeks, and potentially in a first budget? Doug?

Doug Porter:
Thank you. Yeah, thank you, Scott, and good morning everyone. So from a very big picture, I would say we definitely have a political status quo, but I don't believe that we necessarily have an economic status quo. Because as you touched on on your opening remarks, one key feature of this campaign was basically every party was looking at cranking up spending in the years ahead. Even the Conservatives had a relatively I would say generous fiscal plan over the next few years. There was really no drive whatsoever to reduce the deficit. And that's despite the fact that revenues have actually been coming in better than expected.

Doug Porter:
But essentially, every major party's platform looked at different ways to spend that revenue windfall we've seen this year. And so ultimately, while there isn't likely to be a big change in the deficit outlook, I think there is going to be quite a bit more fiscal spending over the next couple years. I would largely echo your view that while there was some discussion of the economy, it definitely took a backseat to other issues during this campaign, unfortunately. I don't think there was really much serious discussion on how to strengthen the competitiveness or the productivity of the Canadian economy. I don't think there was really that much of a growth agenda. There was a lot of talk about redistribution, but there wasn't a lot of talk about how to fundamentally strengthen the economy.

Doug Porter:
But to your point, I think the main takeaway is there has been a discernible shift, basically acceptance of relatively large deficits. We are looking at the deficit to come down, and come down fairly aggressively over the next year as the economy more fully reopens, hopefully. But we're still likely looking at something on the order of about a $60 billion deficit next year, almost I would say at a minimum. And just keep in mind that's about twice where we were before the pandemic began. So for me, that was really the key takeaway is that we are looking at fundamentally more fiscal spending over the next couple years.

Doug Porter:
Now, of course we're in a minority government. So all the proposals that we saw during the campaign have to be taken with a little bit of a grain of salt. But certainly there was a lot of overlap in terms of some of the main priorities between the Liberals and the NDP. And I think they will ultimately find quite a bit of common ground, whether it's on things like childcare or some other taxation policies. And again, I think the net result is even more fiscal spending, above and beyond what we saw in this year's budget.

Scott Brison:
Thanks, Doug. Now Earl. Thanks, Doug. Earl, looking at the results of the election, and during the election we saw some elevated inflation numbers. All this stimulus, which it seems like the spigot is actually turning more open, not less so, as the result of this election. On top of the inflationary pressures we have now, what do you see the impact of this ramped up stimulus in the current economic environment? What do you see the impact being, for instance on bank policy, monetary policy moving forward, and some of the other impacts on the broader economy?

Earl Davis:
Yeah, I'll answer your question directly. But I want to put things in context first. I think it's important to highlight the S&P affirmed Canada's triple-A rating in the spring. And they did that in light of the higher deficits. And I think that gave all the parties basically a pass on talking about the economy, because S&P said basically, "You're good for now." They actually said two years. So I think that was an important message locally and globally.

Earl Davis:
But they did say we're still a risk for a downgrade after two years, and that's dependent on fiscal health, which is a function of spending, and a function of revenues, and revenues is growth and tax policies, basically driven by that. So I think it's important to remember the S&P gave everyone a pass this election. But I do believe it'll come back on to the next election.

Earl Davis:
Speaking and carrying on Doug's point in regards to economic political stability, but lack of economic stability, and a distribution of wealth, I fully agree with that. I think we're undergoing a secular change, a change that'll last 5, 10, 20 years. We're removed from the period of wealth accumulation, you save through your stocks and your bonds, and past 20 years that's been great, to wealth distribution. Now the baby boomers are retiring. They're cashing in their stocks, their bonds. And wealth distribution from government.

Earl Davis:
With the equality divide, that's what you get. It's widest gap in decades. You get more populist, centrist measures, or the axis shifts to the left, as we've seen in this election. And the implications of wealth distribution are higher inflation, higher volatility, and higher interest rates. Not to say it'll happen next month, or even next year, but this is a 5, 10, 20 year phenomena that I think we're just now starting.

Scott Brison:
Thanks, Earl.

Earl Davis:
Yeah. So one more thing. Monetary policy, I do see higher rates because now, if inflation moves from transitory to sustainable inflation, then the central banks are behind the curve. So they have to raise rates higher, to markets discounting. The risk is they raise them higher and faster than the markets discounting. And that's where you get enhanced volatility. It's not my base case, but I think it's a real probability with the probabilities increasing week by week.

Scott Brison:
In the current environment, that additional stimulus, if it does, I mean it will inevitably strengthen or bolster inflationary pressures and higher rates. Is there a risk that ironically, the stimulus designed to help the Canadian economy drives monetary responses which actually ultimately make it more difficult to create private sector growth and jobs in Canada? Is there a risk of getting that fiscal balance wrong, and potentially driving a monetary policy environment that's not conducive to growth and jobs?

Doug Porter:
Yeah. So this cycle is like no other we've seen. And I think policymakers have to respond differently than they have in the past. An issue we've been trying to pound home is that demand is not a problem in this cycle, in this recovery. I would say actually the opposite is the case. In some sectors, we actually have too much demand. In fact, we're facing supply challenges left, right, and center. Whether it's automakers can't get parts, retailers can't get goods on the shelves, restaurants can't get workers to man the kitchens, it's basically a supply constraint that we're facing.

Doug Porter:
And so absolutely, the wrong answer at this point is to pour more stimulus on an economy that's facing supply challenges. What you get is when you pour extra stimulus on a supply constrained economy is you get more inflation. And just one very narrow example of that I can give you is in the housing market. Obviously, we faced pretty clear supply constraints in the housing market. We've had a ton of stimulus poured on that sector, and we had house prices explode.

Doug Porter:
Now, that's an extreme example, but I think essentially that's what we're seeing right across the economy, and that's why we're looking at the highest inflation rate since the early 2000s, and the highest core inflation rate in almost 30 years. We do believe that some of the run up in inflation that we've seen will pass. Clearly, the kind of spike we've seen in things like auto prices are not going to persist for much longer. But on balance, we believe that even in a relatively positive scenario, we're probably looking at average inflation of close to 3% or a bit above both this year and next. I am concerned that just pouring money, pouring more stimulus on this economy does risk somewhat higher inflation over the next year.

Scott Brison:
And Earl, in terms of ... And not all stimulus is created equally. I'd be interested in your perspective and Doug's perspective, actually starting with you, Earl, and what government spending should focus on if the objective is longterm growth and competitiveness? So in other words, what are the types of initiatives that the government can invest in or spend on that is more accretive to the economy, and potentially doesn't have the same inflationary pressures that could have a dampening impact through monetary policy response? Earl, we'll start with you, and I'd be interested in your thoughts, and then turn over to Doug for his thoughts on if you're giving ideas to the new finance minister and parliamentarians, I'd be interested in what you would like to see them focus on. Earl?

Earl Davis:
Thank you, Scott. Yes, thank you. The theoretical answer is easy. The practical answer is where the challenge is. Theoretical answer is you put money in items and things that increase your productivity. That means you get less inflation. Examples of that are infrastructure. You make your roads better so people are getting to work quicker, so they're actually working longer. I think another one, which is arguable for some people, but I think it increases productivity is childcare, which they are proposing to do in regards to getting more people into the workforce, specifically women into the workforce. That increases productivity.

Earl Davis:
So you want to see the government spending where you're actually going to get productivity, get more growth going forward. And I think that's partially what they're trying to push for, get to that virtuous cycle of growth. Once they get there, then they can take away some of the stimulus, because it becomes a self-sustaining economy. But to Doug's point, the practical easy answer is difficult because of the supply constraints. You could put the money there into infrastructure, but then who's going to work to do it? And then where does that money go? It goes into non-productive items, and that's what causes inflation, and that's what the risk is to the market.

Doug Porter:
Yeah, I think from a short term view, obviously we have to deal with the pandemic and the immediate aftermath of the pandemic. That really is job number one for the finance minister. But really, the next challenge beyond that in the next one to two years is basically weaning the economy off the extraordinary stimulus and support we've seen, and getting fiscal finances in relatively firmer shape. One point I've been making is an issue is that the longer it takes to get finances back into reasonable shape, the more vulnerable we are to the next crisis, or the next big issue that the global economy faces.

Doug Porter:
And we know something will arrive in the next, who knows, 2, 5, 10 years. But we know there are going to be some new and different challenges down the line. We have to set the groundwork for that. Above and beyond the pandemic and the aftermath, I really do think the focus has got to be turn back to the innovation angle and the shift that we're going to see, ultimately reducing our dependence on the resource sector in particular, the oil and gas sector, and basically strengthen the productivity of the economy. That's easier said than done, but I really think that's where the focus has to be over the medium term.

Scott Brison:
Doug, thanks very much, Doug. And so on one of the fiscal concerns that some people have is the rising level of indebtedness of Canadian provinces alongside of big deficits on the federal side. A combined fiscal indebtedness of federal and provincial governments, and the growth of that coming out of COVID. Is the economic community and our financial markets mindful of the combined fiscal exposure of both provinces and the federal government, because not everybody considers the provincial fiscal situations as thoroughly when they're looking at the Canadian economy. So I'd be interested in how concerned should we be about the extremely indebted provinces and territories at this time?

Doug Porter:
Yes, thank you, Scott. I think that is a somewhat underplayed factor whenever we talk about Canadian government finances, and of course Ottawa loves to point to their own relatively contained debt to GDP ratio. But the reality is what matters for overall creditworthiness is the total government debt to GDP. And from that angle, yes, we are mostly stronger than the rest of the G7, but we're not in a different league. We are somewhat firmer, but when you combine the provinces in the mix, we're not extraordinarily stronger than other countries.

Doug Porter:
And I think that's one of the reasons why I am somewhat concerned about this underlying deterioration that we've seen in federal finances, is because ultimately, when we look 5, 10 years down the line, some of the provinces are going to need help. Some face very serious demographic issues longer term, and the healthcare spending that goes with that. There is an imbalance in sort of the spending pressures that the provinces will face and that the federal government faces over the medium term. And ultimately, we do have to take the provinces into account.

Doug Porter:
Now, some of the good news over the pandemic is the provinces were helped a lot by the federal government. Certainly, the federal government took the lead in terms of pandemic spending, and for the most part, provincial finances did not deteriorate nearly to the same extent that the federal government did. But still, I think whenever we talk about Canada's overall fiscal health, we do have to take the provinces into account.

Scott Brison:
Thanks, Doug.

Earl Davis:
Let me continue on that just for a quick second, is that the international investors still are ... Provincial product is still very much in demand here. And I think it falls on the point that Doug said, that compared to the other G7s, we're still relatively good. So the spreads for provincial product are at tights basically, which says there's a lot of demand for the product. And I think that's a comparators thing. I think yes, we will have to be more concerned on the next downturn, but for now, they have the ability to improve growth and build the economy. I think they have a good possibility of continuing being able to issue these tight spreads. Thank you.

Scott Brison:
Great. Earl, you had mentioned earlier that you're a believer in early learning and childcare as something that strengthens the access to the workforce, equality of opportunity, and as a public policy, along with infrastructure. Another public policy that has emerged as being very important to get us through COVID has been CERB program, CERB-type programs to help reach people through this. And talking to the business community and truly the small businesses right across Canada, I'm hearing that it's really tough to get workers now. That there is a real issue in terms of having the ability to attract and retain the employees you need to run your businesses. Any advice to the government on some of the programs and funding that was established to help get businesses and families through COVID? What would your advice be moving forward in terms of ratcheting some of that back, getting more into a private sector, sustainable economy, and weaning ourselves off some of there programs? Is there a risk that we keep them in too long? That it's really distortionary of labor markets and impactful negatively on productivity?

Earl Davis:
Yeah, it's more than a risk, because we're actually seeing the impact of it right now. Anecdotally, you have a lot of fast food restaurants that can't hire enough employees. And they can't even open because they can't hire employees. So I think it's a matter of tapering CERB, if not ending it. And not looking to cut spending, just redistribute that elsewhere. And I think there's very strong argument from both the economic perspective as well as individual perspective. They still will be able to have a wage, and to have a good wage, with minimum wages increasing. May not be the equivalent of CERB, but it's still a good wage. So I think it's important taper that to accelerate the growth of our economy.

Scott Brison:
Great. Doug, I'd be interested in your thoughts coming out of this. There's a lot of the signals are fairly consistent coming out of this election directionally, I would say, in terms of spending and fiscal and tax policy. What do you think the impact will be on the Canadian dollar over the short term, and potentially mid-term, assuming that these policies make their way, or these policy ideas make their ways into government policy?

Doug Porter:
Yeah, and thank you, Scott. I think the reality is is that the Canadian dollar, of course, is driven by much bigger global factors than anything homegrown. I mean, we can affect it, of course, in some cases. But generally speaking, the number one driver of the Canadian dollar over time is the US dollar itself. When the US dollar is rising against other currencies, we tend to weaken along with everyone else. And of course, the next factor overall is largely commodity prices.

Doug Porter:
I would say those two factors will probably mostly fight to a draw over the next year. Our official forecast has the Canadian dollar actually slightly strengthening over the next 12 months. Nothing beyond 1% to 2% or so. But overall, our view is that in a world where the global economy, the recovery will strengthen over the next year, commodity prices we believe will remain relatively firm. We're still looking at oil prices of around $70 a barrel, which is positive for the Canadian dollar. Those will be enough to support a very modest increase in the Canadian dollar.

Doug Porter:
And even though we've been left with a status quo result, I think what we're seeing today is a very small sigh of relief from the markets in that there's really no big curve ball that's been thrown at them. They've got a little bit more certainty they can deal with and basically move on to greater forces. When we look out longer term, I'm a little less optimistic on the Canadian dollar. Until and unless we address some of these competitiveness challenges that both Earl and I have discussed, and the focus that's been more on redistribution rather than growth, I'm concerned that the Canadian dollar will tend to soften over the medium term.

Doug Porter:
Longer term, I believe sort of an anchor fair value for the Canadian dollar is something in the range of around ... I hate to put a decimal point on it, but close to 77 cents. In other words, somewhere between 75 and 80 cents I believe is relatively fair value for the currency. But as I said, unless we address our competitiveness challenges, I think we'll tend to drift a little bit below fair value over the medium term.

Scott Brison:
Great. So you'd like ... So while you don't disagree with some of the redistributive policies, you'd like to some growth and competitiveness policies so that we would ultimately have more to redistribute in the end, but focus on that side, as opposed to pre-distribution, which is kind of distributing the wealth before you make it, which is something that is kind of like the new math, or the statement that this time it's different.

Scott Brison:
But we've got a question from one of our BMO client audience members. The housing market has been pretty hot. Do you see some possible changes to the market after the election is over? What are you seeing in terms of any public policy shifts or impacts on the housing market coming out of this election? I'll start with Earl.

Earl Davis:
Yeah, well I think there's been speak of CMHC reducing the premiums for its insurance on high mortgage housing or mortgages. So I think that may have, on the margin, a beneficial effect. In the end, there's three things that impact housing and the strength of housing. One is banks' ability to lend, and banks are doing extremely well and are lending. Your interest rates. Interest rates are still ultimately extremely low right now. And until they go higher, I think it makes it attractive. And tax policy, and there's no explicit tax policy right now that would impact housing. So I see it continuing as it has. I don't see it necessarily accelerating, with the biggest risk to it being a dramatic rise in interest rates, which if that happens, it's a late 2022 story.

Scott Brison:
Great. Thanks, Earl. And Doug, do you have any ... The housing market as broader envelope of affordability issues was prevalent, you could sense that, and candidates were hearing that on the doorsteps. So it was an important issue during the election for a lot of people. What do you see the impact coming out of this of some of the proposed policies?

Doug Porter:
So this is one area where I think we actually might see some fundamental change over the next year. And frankly, if there was any surprise on the economic front, it was some of the policies put forward on the campaign trail on the housing side. And again, of course we have to be mindful that we're dealing with a minority government, and we don't know that they're all going to become law. But the ruling party, Liberals, actually brought in some pretty serious changes that they're talking about. Some, I think, can work and be effective, and others probably won't do much.

Doug Porter:
But just as a quick reminder, the Liberals were talking about bringing in a flipping tax. If you sold your house within a year, they were talking about a tax-free savings account for first time buyers. They were talking about doing away with blind bidding. They talked about, which to me was a surprise, was basically banning foreign investors, or foreign buyers I should say, for two years in the housing market. That's quite a step for the Liberals. And there was some overlap overall on the policy front.

Doug Porter:
At the same time, there were also a number of measures that talked about supporting first time buyers, which I again, I think is just pouring fuel on an already very hot housing market, and probably would not be effective. But this is certainly one area to keep a keen eye on, because there were a lot of pretty important changes that were pledged during the campaign. To Earl's point though, ultimately our view is that this housing market is not going to be seriously brought to heel until interest rates ultimately go up.

Doug Porter:
We don't see the Bank of Canada moving on interest rates until late 2022. So I think unless we get some really dramatic, different moves above and beyond what's been suggested, we're still relatively constructive on the housing market.

Scott Brison:
How much credence do you pay to those who say that actually, the housing crisis is driven by a supply issue, and governments have to focus on more than just more money going into building housing to try to deal with it? But there are some real impediments to building housing, and some of that is on the municipal side as well. But is there much in these platforms that can really tackle the supply issue that seems to be driving a lot of the challenges in the housing market? Is there a significant ... Is there likely to be a significant impact on getting more housing built to try to reduce some of that pressure? Doug?

Doug Porter:
So I do not want to downplay the supply issues whatsoever. That is definitely an important element of our issue. But I would argue that it's like we're caught in scissors of externally hot demand on the one side because of extraordinarily low interest rates and very strong population growth, and other side we are caught on the other side of the scissors between a very slow supply response. The reality is is the federal government cannot do that much on the supply side. In some respects, it's almost like we had a bidding war going on during the election campaign in terms of which party was going to build more houses over the next 5 to 10 years.

Doug Porter:
The reality is the federal government does not build many houses. They can't build that many houses really. That's mostly at the private sector. And the supply issues really are more in the domain of the provinces and the municipalities. And it takes time to get supply in the market. So the reality is is what can federal government policy do in the short term to affect housing affordability? Really it's controlling demand as best they can, and doing what they can to support the supply side. But there is just no magic wand to be waved on the supply side. It takes time, it takes hard effort. It's not a light switch that can flipped on or off. That's not to say that there shouldn't be a lot of focus on the supply side, but I've long made the case that we have to look at both sides when we're dealing with housing affordability issues as severe as we're dealing with right now.

Scott Brison:
Right. Thanks, Doug. Now Earl, we've touched on Canadian interest rates and potential impact on Canadian rates. There's a lot of government stimulus going into the economy in the US as well. And where do you see any thoughts on US rates in the short and mid-term?

Earl Davis:
Yeah. It's a very similar situation to Canada actually, where it's the inflationary dynamic that's going to drive interest rates, whether it's transitory or sustainable. Tomorrow, at the Fed announcement, the FOMC meeting, we'll get some insight into that. And I think the markets a little bit concerned about that. You're seeing some movement in interest rates whether Fed Governor Powell will acknowledge that this transitory may last longer than anticipated, which is the path to sustainable, because of housing and wages. Both are experiencing extreme growth. So our outlook's very similar to Canada.

Earl Davis:
We think the probability of higher rates is increasing. It'll be driven by higher inflation and central banks feeling that they're potentially behind the curve, which accelerates how much they increase interest rates, and not by growth. We are definitely experiencing decline in growth, but we're still well above normal growth. So I feel comfortable that the economy will be able to handle higher rates. But it'll be a volatile ride. Thank you.

Scott Brison:
Great. Thanks, Earl. Doug, another question from our audience, and that is on the small and medium businesses in Canada, small and medium size businesses. COVID has been a really tough hit for an awful lot of small businesses in Canada. And as we go back to whatever the new normalized economy is going to be post-COVID, what should government do to help our small businesses prosper as we move back to ... Survive and prosper as we move back to whatever the new normal is going to be, but a late-COVID and post-COVID environment?

Doug Porter:
Yeah, from my perspective, when we talk about a K-shape recovery, and by the way, I haven't heard that term in quite some time, but I think it still applies very much. And the best way it applied was by sector. Clearly there are a number of sectors of the economy that recovered not only rapidly, but they actually came back even stronger than before the pandemic. But then there's whole sections of the economy that are still basically flat on the floor or struggling to survive.

Doug Porter:
And sadly, most of them are heavily concentrated in the small business sector, small and medium size sector. And so fundamentally, I think that this is ... When we talk about extending COVID support, really this is where the focus has got to be, just to get small business through this incredibly difficult episode. I believe that that's where the fiscal support should be still aimed at this point. And then, when we're on the other side of it, I think that's when we can ... When the dust has finally settled, that's when we can start reviewing all the core levels of support.

Doug Porter:
I would say in general, the tax system actually in Canada, arguably to a fault, is incredibly supportive of the small business sector. So I don't think that's necessarily an area that we should be looking at changing. Again, I think we have to get through this very difficult episode before we talk about restructuring our kind of support levels for small and medium sized businesses.

Scott Brison:
There wasn't much discussion in this election about trade and the global economy. Of course, the toughest question, or one of the toughest questions we're facing in terms of foreign and trade policy is the whole China question. This is one that dogged the government before and during the election. How do you see the trade environment? And I've already asked you about your advice to the minister of finance, the next minister of finance. But your advice to the next minister of trade, given the challenges with the relationship in China, and the ongoing, quite protectionist environment in the US and by American policies, what should the government be focusing on in terms of its trade policy? Where should the priorities be, Doug?

Doug Porter:
Yeah, it's interesting. If we go back, way back to the good old days of two years ago, before the pandemic of course, the biggest issue we were dealing with was first wrapping up the new NAFTA or CUSMA, and then of course the brutal trade war that was going on between the US and China. And it's interesting, in the new administration in the US, to some extent, things really haven't changed that much on the trade front. We're still dealing with a relatively protectionist, different sounding protectionism from the Biden administration. But still, I would say relatively protectionist, and still pretty much as tough on China in a different form than the Trump administration was.

Doug Porter:
What would I recommend to Canada's trade minister? I think first and foremost, we have to deal with our most important relationship, and that's with the US. We have to do what we can to make sure that Canada isn't untowardly affected by the buy American proposals. On China, that, as you said, barely, barely came up in the campaign at all. I do think we have to have, I would say, almost a reset on that front. We have to have a complete rethink. And I think we have to be in sync with our allies on that front.

Doug Porter:
We can't go this alone. I think we basically have to be largely in tune with our major allies in how we approach China in the years ahead. Obviously, there are huge shifts going on in China right now. I would say if you were to summarize it in a neat sentence, effectively the pendulum is shifting in China to much more of a, I guess I would call it a command economy. It's almost sector by sector that the president is going through and forcing his will on. So we are dealing with a very different world than we thought we were just as recently as a few years back.

Scott Brison:
Great. Thank you. Earlier, Earl mentioned infrastructure as being a key to the future prosperity and competitiveness. And one key area of infrastructure that did come up during the election is broadband connectivity in the regions for people, regardless of where they live in Canada, for citizens and businesses to compete, the need for digital connectivity is extremely important. And when you say infrastructure and investments in infrastructure, are you including digital infrastructure as the kind of investments that governments and the government now, the newly elected Justin Trudeau liberal government, ought to focus on?

Earl Davis:
I would say without a doubt. And the reason why I say that, that's an investment in our people. There's a lot of people in the rural areas who had difficulties with education. That's because they didn't have access to the schools because their technology wasn't up-to-date. So I think that's a fundamental area of investment to ensure that we have the education and the talent pool that's properly educated to take advantage of the other initiatives to increase productivity. So without a doubt, I would agree that's part of the infrastructure [inaudible]. Thank you.

Scott Brison:
Great. Thank you very much. I think time marches on. We've got, I think ... I think we're nearing the end of our allotted time. But I'd like to turn things over to both Earl and Doug to give a little more clarity from where they're sitting, to our BMO clients, on the expected, in the coming weeks, and the first budget. We touched on this earlier, but anything to expect on the tax side? Looking at party platforms, any thoughts of tax, both directionally, but any specific measures that we ought to be mindful of for ourselves, for our clients? And I'd be interested in your views on some of those proposals and their potential impact on both business and citizens building wealth here in Canada. And I'll start off with Earl on this one, and then move on to Doug for that. So this is also a big of an opportunity to wrap up our conversation this morning. So Earl?

Earl Davis:
Yeah, I'll let Doug speak to specifics, but I definitely do expect higher taxes. The rate agency said, "You got to keep the fiscal house in order." And how do you do that? Increasing taxes. And I think it'll be both personal and corporate. But I'm an eternal optimist. I think we're in exciting times. I think it's definitely turbulent out there, but that's what you get when you're going through a change in weather patterns. But I see blue skies ahead. And a love being a Canadian. I love being a BMO employee. And I think the future, we'll be in good hands.

Doug Porter:
I think in my 15 second elevator speech, I'd say even though we've ultimately got yet another government facing us, we would change our economic forecast based on last night's results. We're still looking at roughly 5% growth in Canada this year, and about 4.5% next year. We wouldn't change our view on when interest rates are likely to rise. We think that happens in the fourth quarter of next year. We didn't talk much about specific tax changes. I'd actually rather not delve into specific because I think to some extent, it's entirely speculative when we're dealing with minority governments. I would just urge people to look at the policy proposals of both the Liberals, and the NDP party are likely to be their dance partner. And just see where there is overlap.

Doug Porter:
I think that by talking about specific taxes, it's almost as if we're opening the door to them. And my own view is anything that can possibly frustrate this recovery is not welcome at this point. And I do view that tax increases are just not a welcome addition to the recovery at this point. But certainly, when you look at the laundry list of potential tax increases that the NDP have proposed, there's probably going to be one or two that the Liberals will agree to get their acquiescence on the next budget. And I think I'll just leave it at that, Scott. Thank you.

Scott Brison:
Great stuff. Yeah, and thank you very much, Doug. Thank you, Doug. And thank you, Earl. And most importantly, thank you to our BMO clients for participating this morning. BMO understands full well the importance of elections, democratic participation, and the importance of the economic policy that is brought forward during these elections. We will, across BMO, from BMO Capital Markets, BMO Global Asset Management, BMO Economics, be sifting through both the data and the decisions in the coming weeks to keep our eye on the ball on behalf of our clients in Canada, both ranging from families and small, medium enterprises, businesses of all size. BMO has your back. And we are looking forward to working with you in the future as you chart your family's course and your business's course during an interesting political period with a lot of moving parts.

Scott Brison:
BMO is here for you. We are here to help. And we're working as a purpose-driven organization to grow the good in business and in the people and the communities we serve. And I want to thank our BMO clients for participating today in this important discussion. And we're looking forward to deepening our partnership with you as we move forward. Canada emerges from this election as, again, reaffirming we are a fantastic country with huge potential and opportunities. And BMO is very proud of the role that we play, both BMO, and also broadly, Canadian banks, the financial sector, and helping drive prosperity and growth that is inclusive and sustainable for all Canadians. So thank you very much for your participation in the conversation today. And all the best in the coming hours, days, and weeks as we continue to view and consider the impact of election 2021 in Canada. Thank you very much.

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