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

Thu Mar 6, 2014 2:49pm EST
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By Jennifer Kwan

VICTORIA, British Columbia (Reuters) - Canadian exports were unexpectedly weak over the past two years, partly due to U.S. budget cuts and the expiration of tax breaks known as the "fiscal cliff," that took effect early last year, a senior Bank of Canada official said.

Deputy Governor John Murray said in a speech on Thursday that lackluster Canadian economic growth and three puzzling trends - weak inflation, investment and exports - could be partly explained by international factors.

He also pointed to Australia as evidence supporting the central bank's forecast for a soft landing for the Canadian housing market.

With respect to exports, there has been an apparent disconnect between foreign demand, particularly in the United States, and the performance of Canadian non-commodity exports.

This has surprised policymakers, but Murray said 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, and incorporating it into the bank's measure of foreign activity, the bank is better able to understand how exports behave, he argued.

"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 from January 1, 2013, which had the potential of pushing the U.S., Canada's biggest trading partner, back into recession in the absence of an alternative deficit-reducing political deal.   Continued...

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie