By Marc Chandler
Canada reported weaker than expected retail sales report. Instead of a 1.0% rise in January, StatsCan reported a 0.3% decline. Weakness was especially noted in the ex-auto component which was flat instead of up 0.7% as the consensus expected. This is the second consecutive monthly decline (Dec -0.2%) and should reinforce perceptions the BOC is on hold until at least midyear. Canada led the G7 countries in growth in Q4 and is the first to regain all the jobs lost in the economic downturn. However, the consumption is expected to slow this year and the central bank expects housing to be a drag on growth. In addition to the disappointing retail sales data, Canada’s fragile political climate warrants caution for CAD bulls.
The Conservatives have done well as a minority government but some recent scandals have raised issues of trust and competence that the opposition is seeking to take advantage of and that strategy seems to be paying off.
There are two key events that should be monitored.
First the government presents its budget this afternoon (4 pm EST). It will need support from at least one of the opposition parties. The local press reports the likelihood of an election budget–stay the course budget with some spending gifts for disenchanted electorate, including for the arts (for PQ) and tax break for homeowners who adopt energy saving improvements (for NDP) Of note the budget is expected to proceed with the corporate tax cuts, approved in 2007, to cut 1.5% off the tax schedule rate to 16.5% and then 15% in 2012.
Therein, incidentally, lies part of Ireland’s defense that their low corporate tax rate–partly it is about tax schedules not effective tax rates and partly other countries, including the expanding euro zone area, have low corporate tax rates. Opposition Liberals argue these tax cuts cannot be afforded and it is skeptical over the government’s proposals to purchase 65 new fighter jets.
The second key issue that could bring down the government is the censure delivered by the opposition Speaker of the House which claims the government misconduct. This can be voted on as early as tomorrow and if it passes would allow a vote of confidence.
The polls appear particularly unclear now making an election a gambit for all stakeholders. Some pundits are suggesting the Conservatives could win a majority. However, if this were really the case, one might expect the Conservatives to embrace an election instead of seek to avoid one. Other observers suggest that the main opposition Liberals might not be doing much better in the polls, but the NDP appears to be picking up ground in the West and this might be enough to deny the Conservatives of a majority. Yet there are many forces that argue against a center-left coalition government.