What a U.S. government shutdown means for Canada

What a U.S. government shutdown means for Canada
What a U.S. government shutdown means for Canada

OTTAWA — Once again, Canada’s economy is being overshadowed by our big neighbour.

Despite data on Monday showing a strong rebound in growth here, it’s the funding crisis in the United States that dominates the spotlight.

How the current U.S. shutdown threat compares to past ones

OK, gridlocked politicians we’re used to. But why padlock the Statue of Liberty?

You don’t see other democracies shuttering landmarks and sending civil servants home just because their political parties can’t get along. Belgian civil servants, for example, carried on nicely for a year and a half while their politicians bickered over forming a new government.

“All eyes are focused on the U.S. and that’s just the way it’s going to be until they figure this thing out,” said Benjamin Reitzes, senior economist at BMO Capital Markets.

“We’re very stable. Unfortunately, we need everyone else to pick up before our economy can really start moving. So, we’re kind of at their mercy.”

Any sign of growing U.S. momentum would benefit Canada’s economy, which showed a strong rebound in July, according to the most recent monthly data.

But anything less than solid U.S. growth would pull us down, as well.

“This is a reminder that while Canada’s economy remains strong, we are still vulnerable to uncertainties outside of our borders, especially in the U.S. and Europe,” Finance Minister Jim Flaherty said Monday.

“We are focused on the priorities of Canadians — jobs, growth and long-term prosperity. Global uncertainty reminds us how important it is to maintain that focus.”

The current U.S. crises — first, the stop-gap spending measure to avoid a shutdown of non-essential government services and, second, a debt-ceiling deal to avoid a government default on Oct. 17 — could also delay the U.S. Federal Reserve’s plans to reduce its $85-billion-per-month bond-buying program.

“Hardened positions mean that this could easily last until the mid-October debt ceiling bill,” said Avery Shenfeld, chief economist at CIBC Capital Markets.


“October’s [Fed] meeting will not look like an opportune time to reconsider a start to tapering bond purchases, since we might, at that point, still have a spending bill that expires in mid-November,” he said.

“If the budget is settled with minimal changes to the existing plan, we still favour a December start to tapering.”

On Monday, Statistics Canada said our economy appeared rejuvenated in July, growing at the fastest monthly pace in two years, mainly because the impact of Alberta floods and construction strikes in Quebec in June have receded.

Gross domestic product grew 0.6% in July, matching the pace for the same month in 2011, the federal agency said.

The July recovery was led by the construction, manufacturing and energy sectors.

Economists had expected slightly weaker GDP growth of 0.5% in July, following a 0.5% drop in the previous month and a milder 0.2% advance in May.

The impact of a shutdown in U.S. services could begin to be felt as early as Tuesday, or shortly thereafter, if Congress fails to reach a compromise on spending.

FP1001_CanadaGDP_C_JR“We had been fairly upbeat in our [U.S.] forecast for 3% growth Q4, but the shutdown, and some disappointments in durable and capital goods orders, now looks to trim that to 2.3%,” said CIBC’s Mr. Shenfeld. The Q3 outlook is just 1.6%.

For Canada, CIBC is looking at 2.7% growth in the third quarter and 2.2% in the fourth quarter.

“Through the link to capital spending, rather than the government shutdown, that might shave at most a tick or two off Canada’s Q4 pace,” Mr. Shenfeld added.

One of the major roadblocks to an agreement is a Republican push to delay by a year President Barak Obama’s Affordable Care Act, often called “Obamacare.”

“Congress has two responsibilities: pass a budget, pay the bills,” Mr. Obama told reporters Monday in Washington. “And, certainly, we can’t have any kind of meaningful negotiations under the cloud of potential default — the first in U.S. history.” --Gordon Isfeld, Financial Post

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