Produced by RBC Global Asset Management's Chief Economist Eric Lascelles, the #MacroMemo covers what's on our economic radar for the week.
o First, many of these U.S. trade practices are undeniably of questionable legality and the rate at which they have been delivered is ratcheting higher.
o Second, the action warns the U.S. that Canada isn’t about to be cowed by threats or protectionist actions. This may instead be an attempt to force the U.S. to pick a fight with someone else. After all, Canada has been the surprise punching bag for U.S. trade policy despite being responsible for precisely 0% of the U.S. trade deficit.
o Third, the action may reflect a growing resignation on the part of the Canadian government that NAFTA is at real risk of being eliminated, in which case it would be very handy to have a case already wending its way through the sluggish WTO system as that is where future trade issues will have to be settled absent NAFTA.
o A NAFTA termination letter does not result in the sudden death of NAFTA – to the contrary, it starts the clock on a six month cooling off period, after which the U.S. could opt to exit from NAFTA. However, there is no obligation to leave at the end of the period. Any such action by the U.S. could just be a bargaining tactic, with a variety of outcomes possible after six months.
o Legal experts are still torn on whether the President has sole discretion for pulling out of NAFTA. Republicans in Congress are broadly against this move, and have considerable leeway to delay or even reverse the practical effects of a NAFTA exit.
o Small technocratic advances were achieved over the fall between negotiators, suggesting no inevitability to NAFTA being torn up from the U.S. perspective.
o Trump’s big tax reform win might reduce his need to deliver another “win” to his base, particularly an economically dubious one that most Americans oppose.
o The longer Trump goes without killing NAFTA, the lower the likelihood that it will be killed. This is true both in the sense that it illustrates he is apparently willing to consider other options and given the complication of the approaching midterm elections.
-Research by Krystyne Manzer
As of December 11, 2017
Substantial Saudi risks:
Chinese financial reforms:
Monthly economic webcast:
A new Fed Chair:
U.S. tax reform update:
U.S. corruption investigations:
o The Fed’s own dot plots from September clearly point to one further rate increase in 2017 in the opinion of Fed participants.
o The market prices in an 83% chance of a December rate hike.
o The U.S. economy remains strong.
Bank of Canada review:
o Data dependency was again emphasized, in line with earlier speeches by Governor Poloz.
o A cautious path forward: the BoC “will be cautious in making further adjustments to the policy rate.”
o Downside risks emphasized in the press conference: “more preoccupied with the downside risks to inflation.”
o The Canadian economy has become more sensitive to interest rates, meaning that less rate hiking is needed to achieve a particular aim.
o High uncertainty was emphasized as a key factor, implicitly motivating the delay of any near term action. The cited risks were of a geopolitical, fiscal and trade policy nature. For our part, we increasingly anticipate a negative outcome to the last of these three variables.
o The strong currency was cited as a reason for inflation’s return to normality to be delayed until the second half of 2018.”
o Inflation measures edged higher, as expected.
o The Canadian output gap is now closed, a quarter ahead of schedule (though, confusingly, the labour market component of this is still a little distance from normal, and inflation normalizes even later – usually these things are all synchronized).
o The Canadian economy grew more quickly than expected in the second quarter and is increasingly broadly based; the Bank’s 2017 and 2018 growth forecasts were upgraded, as was the U.S. growth forecast for 2018 and 2019.
o Oil prices are a little higher than previously assumed (this helps both growth and inflation).
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