Recent economic data for the first quarter of 2018 suggest the global economy cooled off from its red-hot pace of the second half of last year. However, economic activity remains well above its trend (or potential) growth rate, resulting in diminished excess capacity across most economies. This is reflected in declining unemployment rates and rising capacity utilization rates. As a result, inflation readings have ticked higher as tighter labour and goods markets result in stronger wage gains and quicker price increases. In response, central bankers, including those in Canada and the United States, have become more confident in tightening monetary policy. Strong growth, diminished excess capacity, and rising inflation and interest rates are all consistent with an economy in the later stages of its business cycle.
The 10-year U.S. Treasury yield rose above 3% earlier this week for the first time since early 2014. The news initially sent a chill through U.S. markets, stoking concerns over higher borrowing rates for companies already facing rising costs—and as early quarterly results in the industrials sector failed to deliver positive outlooks. U.S. stocks climbed higher on Thursday, however, after a strong round of corporate earnings reports, led by the technology sector. Also in the U.S., initial jobless claims, a measure of layoffs across the U.S., fell to their lowest levels since December 1969. The tightening job market increases the odds that the Fed will be considering additional rates hikes in 2018.
Global markets have struggled to make new gains since late February. In our view, this is partly due to concerns surrounding widening trade frictions between the U.S. and its major trading partners, heightening fears of a potential global trade war. Thus far, U.S. trade action has targeted certain products (i.e. steel and aluminum). However, recent talk of broader economic sanctions directed at China and aimed at reducing the U.S.’s trade deficit with the world’s second largest economy could increase risks of an escalation. As long as protectionist action remains modest in scale and focussed on a few products, then risks of a global trade war should remain contained, in our view, helping to ease market anxiety. Near-term market focus should shift to monetary policy. The Fed’s rate hiking cycle remains on course with Jerome Powell earlier today steering the U.S. Federal Open Market Committee to its first increase in the Fed target rate (25bp to 1.75% at the upper bound) since taking over as Chairman of the Fed early this year.
On February 27, 2018, Finance Minister Bill Morneau delivered the Liberal government’s 2018 Federal Budget. The budget estimates deficits of $19.4 billion for 2017-2018, $18.1 billion for 2018-2019 and $17.5 billion for 2019-2020. This commentary provides a summary of the tax measures proposed in the budget.
This Budget contained good news for corporations and individuals with no increases to income tax rates, a softening of the proposals related to private corporations, and some minor enhancements to the Medical Expense Tax Credit and the Canada Workers Benefit (formerly known as the Working Income Tax Benefit).