U.S. 'fiscal cliff' may help explain weak Canada exports: BoC

Thu Mar 6, 2014 11:54am EST
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By Jennifer Kwan

VICTORIA, British Columbia (Reuters) - The 'fiscal cliff' of expiring tax breaks and budget cuts in the United States from early 2013 could partly explain why Canadian exports were unexpectedly weak over the past two years, a senior Bank of Canada official said on Thursday.

Deputy Governor John Murray said in a speech that there had been an apparent disconnect between foreign demand, particularly in the United States, and the performance of Canadian non-commodity exports.

This has puzzled policymakers but recent evidence suggests exports rely more heavily than thought on demand from U.S. governments at the federal, state and local level, with about 12 percent of non-commodity exports from 1997 to 2012 going to the U.S. government sector.

By recognizing that, the bank is better able to understand the export weakness, Murray said.

"It relates to the fiscal cliff in the United States and the significant budget consolidation that has been underway there in the past two years," Murray said in his last public speech before retiring on April 30.

The fiscal cliff refers to expiring U.S. tax breaks and spending cuts that took effect from January 1, 2013, which had the potential of pushing the U.S. back into recession in the absence of an alternative deficit-reduction deal by U.S. politicians.

Murray stressed that this explanation for weakness in Canadian exports was a work in progress and not the only cause.

The two big challenges to economic growth in Canada are weak inflation combined with excess slack in the economy, as well as an over-reliance on household spending to drive growth.   Continued...

The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie