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In 2017, Canadian economy will get its first taste of the Trump era

Last Updated Dec 22, 2016 at 6:15 am MDT

FILE - In this Thursday, Dec. 15, 2016, file photo, President-elect Donald Trump speaks during a rally at the Giant Center in Hershey, Pa. Trump's closest advisers see Democrats' complaints that Moscow hacked their private emails this election season as a case of sour grapes. The pushback comes ahead of the Electoral College vote, Monday, Dec. 19, which is expected to make official Trump's election win. (AP Photo/Evan Vucci, File)

The Canadian economy exits 2016 with bruises from the still-tough adjustment to weak crude prices and scars from the devastating wildfires that singed the oil patch.

It enters 2017 with lingering challenges and a potential new obstacle that could attract more attention than the rest: the economic unknowns of a Donald Trump presidency.

While it remains to be seen what will become of the U.S. president-elect’s vows in areas like taxation, trade and investment, their implementation could have significant impacts for Canada.

Canadian policy-makers say they will closely follow developments after Trump takes office Jan. 20.

For now, decision-makers like federal Finance Minister Bill Morneau are reserving judgment on how changes would affect the country.

“Looking towards next year, the change in the U.S. will of course present us with a different economic environment –it’s too early to have a clear view of the impacts,” Morneau said in a recent interview.

“But what I can assure you … is that we’re working to understand the new administration’s economic policies and to present how we can work together with them to enhance their growth and our growth; because our view is that we do better if we are open to helping others.”

For example, Trump has vowed to drop the tax rate for top-income earners by six per cent and by three per cent for middle-income earners.

He promised to bring the U.S. corporate rate, one of the highest in the world, down to 15 per cent from 39 per cent. Such a cut would make the U.S. corporate rate far lower than the average effective rate in Canada, where it’s about 26 per cent when federal and provincial rates are combined.

Prime Minister Justin Trudeau was asked in a recent roundtable interview with The Canadian Press about the potential impact of Trump’s promised tax cuts on Canada’s efforts to bring in foreign investment dollars.

“Let’s not respond too much to hypotheticals,” Trudeau said.

“Obviously, you have to be thoughtful about potential paths, but I’m not going to react to an administration that’s not actually in place yet.”

Trudeau said while taxes are always a consideration, he argued that Canada is attractive to investors for other reasons, including its well-educated workforce, openness to immigration and stability.

University of Calgary tax-policy expert Jack Mintz has said Canada’s ability to lure business investment and top talent would be threatened if the U.S. moves ahead with Trump’s vows to significantly cut tax rates for U.S. corporations and for the highest income earners.

Trump has also made it clear he wants Buy American rules in his planned $1-trillion infrastructure program, which could leave out Canadian companies.

To add to the unknowns for Canada, Trump has called for the renegotiation of the North American Free Trade Agreement.

But some experts say the expectations of Trump’s
business-friendly promises are poised to lift the U.S. economy,
which would help Canada.

Dan North, a senior economist for financial services firm Euler Hermes North America, said U.S. business confidence has climbed since the election, in large part due to the prospect of corporate tax reductions. As a result, North said his company bumped up its 2017 U.S. growth projection to 2.4 per cent from 2.1 per cent.

“We have a fair amount of confidence that we’re looking at a pretty solid year in the U.S. next year, which of course should translate into higher demand for Canadian exports,” North said.

Former Bank of Canada governor David Dodge agreed in a recent interview that he expected faster post-election growth in the U.S. to be a positive for the Canadian economy over the short term.

Over the medium and longer term, however, Dodge thinks Canada could struggle in areas like trade, attracting investment and, in particular, tax competitiveness.

“It’s an enormous challenge, I think, for Ottawa,” he said.

“It is a very unfortunate problem that the minister of finance will have to deal with.”

In 2017, the central bank will remain focused on whether Canada’s disappointing export performance can show real signs of life, current governor Stephen Poloz said earlier this month, during his final news conference of 2016.

Poloz said the bank will also look for the economy to continue to adjust to the sting of low oil prices and for the expected pickup in U.S. growth.

When asked, he declined to discuss what new policies might be introduced in the U.S. and how they could affect Canada. He did, however, say that uncertainty among companies expanded during the election campaign and he believes that sentiment remains “undiminished.”

Still, after what Poloz called a “challenging year” in 2016, he sounded cautiously optimistic for 2017.

“We have enough confidence that we’re on track, but we need to continue to monitor that,” he said. “Of course, the economy and the world economy have shown the capacity to disappoint in the past.”