External risks more acute for Canada than in recent past: IMF

A new report by the IMF says the external risks facing the Canadian economy are more acute than in the recent past.

The agency says the risks relate to the impact of tax changes in the U.S. and the ongoing NAFTA talks.

The IMF also said the housing market continues to remain a key domestic risk for the economy. But it noted that the vulnerability has moderated somewhat, as the housing market has shown signs of cooling down.

It estimated that failure to reach a new NAFTA agreement could reduce long-run Canadian real gross domestic product by 0.4% relative to its baseline forecast. The IMF said it expects the Canadian economy, which grew by 3% last year, to slow to growth of 2.1% in 2018 and 2.0% in 2019.

The reduction in Canada’s long-run GDP could increase if non-tariff trade costs increase, the report noted.

Investing implications of tariffs

Tariff trade costs are firmly on the table, as the U.S. decided last week not to extend temporary tariff exemptions on steel and aluminum exports from Canada, Mexico and the European Union. However, in a report, HSBC says that, because the tariffs affect such a small share of trade flows between affected countries, the immediate economic impact is negligible.

For example, steel and aluminum exports account for only around 2% of total EU exports to the U.S.

Further, although the EU has said it will retaliate on U.S. steel and aluminum imports, it has stated tariffs on other goods wouldn’t be introduced until March 2021, notes the bank. “This limits the risk of a broader trade war affecting a more economically significant portion of trade flows.”

More troubling than the steel and aluminum tariffs, says the report, is Trump’s recent opening of a national security investigation into autos and auto parts imports, “especially given this constitutes a much larger chunk of world trade.” The report adds that the investigation will take several months to conclude, and that there are “major incentives” for all sides to reach an agreeement.

For now, the bank says it hasn’t altered its asset class views, “which include an overweight stance on global equities amid relatively attractive valuations and still robust global economic growth.”

The bank says it will continue to monitor the trade situation, as “a lack of progress in ongoing NAFTA negotiations, limited dialogue between the EU and U.S., and a breakdown in talks with China are all risks to the outlook.”

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Canada’s response to tariffs

Today, Prime Minister Justin Trudeau rejected calls to speed up the imposition of retaliatory tariffs on U.S. steel and aluminum.

Trudeau says he wants to respect the government’s 30-day consultation period on its proposed $16.6-billion tariff package, retaliation for the Trump administration’s decision to impose the steel and aluminum tariffs. The federal government wants to consult with Canadians before enacting its response, which targets not only U.S. steel and aluminum, but also a wide variety of goods from orange juice to playing cards and toilet paper.

Joseph Galimberti, the president of the Canadian Steel Producers Association, says he urged the government in a cabinet meeting today to immediately impose the retaliatory tariffs on metals while it consults on other products.

Galimberti says American steel continues to flow into Canada tariff-free while Canadian steel now faces tariffs south of the border.

During question period, Conservative Leader Andrew Scheer also urged Trudeau to accelerate the response, but the prime minister says he wants to follow through on the consultations while trying to persuade the U.S. to drop the tariffs.

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