The lessons learned here could be instructive to any economy seeking to avoid the liquidity trap and resist the siren calls of negative interest rates.
Canada is not a perfect laboratory and it is not the only economy that is ramping up government spending. However, it is the 11th largest economy in the world and what happens in Canada will serve as a litmus test for stimulative fiscal policy in today’s global economy.
A well-timed fiscal stimulus plan in 2009 played a role in Canada’s relative outperformance in the wake of the recession, at least until the plunge in oil and other commodities hobbled growth and put downward pressure on the Canadian dollar. Advocates of the new fiscal spending plan included in the 2016 budget announced this week are no doubt hoping for a similar outcome.
With inflation close to target and a fiscal solution being offered, the BoC can take a breather.
The Department of Finance estimates GDP growth will be augmented by 0.5 percentage points this year and one full percentage point next year. We think the add-on effects are somewhat smaller than that and we will get more specific in our next forecast update in April. With inflation close to target and a fiscal solution being offered, the BoC is in the somewhat unique position among the world’s central banks in that it gets to take a breather and see how effective the new fiscal stimulus plan turns out to be.
Read the complete commentary here: canada-new-budget-20160323