Will Canada be left out of NAFTA?
Author: Portfolio Specialist Group
September 4, 2018
AGF Weekly Perspectives
“A recap of last week’s top economic news and what’s to come”
NAFTA making progress
- A bilateral trade agreement between the U.S. and Mexico was announced on Monday, putting pressure on Canada to join the preliminary accord.
- The renegotiated NAFTA terms require that 75% of vehicle production must take place within the countries, up from 62.5%, and a minimum of 40% of the value must be produced by labour earning $16/hour, or else subject to tariffs. The terms also include a 16-year sunset clause, significantly longer than the five years campaigned by President Trump.
- Talks between Canada and the U.S. continue, with a dispute-resolution mechanism and concessions around Canada’s dairy industry reportedly two major hurdles to overcome.
Canada’s economic growth picks up
- Canada’s economy grew at a 2.9% annualized pace in the second quarter of 2018, well ahead of the prior quarter’s 1.4% pace, as energy, aircraft and pharmaceutical products surged.
- Net exports accounted for over half of the gain and grew at the fastest pace in four years. Consumer spending and housing also exceeded consensus expectations, while business investment lagged (though remains the strongest component of GDP over the past year).
- Barring further NAFTA roadblocks, an October rate hike from the Bank of Canada appears in play given the current pace of economic expansion.
Trans Mountain pipeline approval halted
- In a surprise outcome, Canada’s Federal Court of Appeal nullified approval of the Trans Mountain pipeline and immediately halted construction on the project.
- The courts claimed the prior approval was “impermissibly flawed” in failing to account for project-related tanker traffic and not sufficiently consulting Indigenous People.
- The ruling now forces the National Energy Board to redo its review of the project; a major setback for the Trudeau government, which purchased the $4.5 billion pipeline from Kinder Morgan Inc. earlier this year.
Other economic news
- U.S. GDP was upwardly revised to 4.2% annualized in the second estimate of Q2 growth. The amendment from the originally estimated 4.1% was helped by corporate profits, as tax remittances fell to three-year lows following cuts introduced earlier in the year.
- Eurozone inflation slowed to 2.0% in August. While the headline price pressures have held close to the central bank’s target, core inflation also slowed slightly to 1.0%. Also reported, the eurozone’s unemployment rate remained at near-decade lows of 8.2%.
What’s to come
Will manufacturing activity continue to slow?
- The U.S., eurozone and several others will report manufacturing PMIs for the month of August. The Bank of Canada will also meet during the week, though no policy changes are expected.
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