What Trudeau’s resignation means for Canada’s economy

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Justin Trudeau says he will step down as prime minister once a new leader of the Liberal Party is selected, ending months of speculation.

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Gov. Gen. Mary Simon has agreed with his request to prorogue Parliament until March 24.

Questions about Trudeau’s leadership have swirled for more than a year, but reached a peak on Dec. 16 when Chrystia Freeland, his deputy prime minister and finance minister, resigned from cabinet just hours before she was to present the fiscal update.

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The move escalated the political uncertainty around the country and caused the Canadian dollar to plummet below 70 cents U.S. for the first time since the early days of the pandemic.

Here’s what economists think Trudeau’s resignation will mean for the economy.

‘New wave of uncertainty:’ RSM Canada

Trudeau’s resignation “ushers in a new wave of uncertainty for the Canadian economy and financial markets,” Tu Nguyen, an economist at tax consultant RSM Canada, said in a note following the announcement.

In a sign of how the political upheaval has rattled markets, Bloomberg’s Canada Economic Policy Uncertainty Index surged to 650, its highest level ever, far outstripping its last peak posted at the start of the pandemic.

The index has typically hung around the 200 to 350 mark over the past few decades.

“The jump in uncertainty highlights the risk to the economic outlook caused by the political sector,” Nguyen said.

Political stability has attracted investors to Canada in the past, and she worries the uncertainty caused by a prorogued Parliament could discourage foreign investment.

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This year was supposed to be a rebound year as inflation continues to ease and Bank of Canada interest rate cuts boost the economy. Now, that rebound could be in jeopardy, Nguyen said, at least in the short term.

“This latest bout of political instability could delay recovery as businesses could delay hiring and investments, instead adopting a wait-and-see approach,” she said.

‘Power vacuum:’ Capital Economics

The upheaval in the Liberal Party creates a “power vacuum” at a bad time as Donald Trump repeated his threat of 25 per cent tariffs on Monday and the clock ticks down to inauguration day, Stephen Brown, Capital Economics Ltd.’s assistant chief North America economist, said in a note.

But considering that Trump has publicly mocked Trudeau, Brown believes a new Conservative government in Canada led by Pierre Poilievre would stand a better chance of working with the new United States administration.

Among the Conservative policies that Brown said would resonate with Republicans are a “balanced budget rule,” a reduction in capital gains taxes and a promise to “significantly reduce” regulations that hinder business investment.

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“At a time when Canada’s productivity performance has been so abysmal, we have some sympathy with the idea that overburdensome regulation is holding back the economy,” he said.

Federal policy ‘sea change’: Oxford Economics

Trudeau’s resignation accelerates an expected “sea change” in federal policy, making a spring election more likely, said Tony Stillo, chief economist at Oxford Economics.

He thinks the New Democratic Party and the Bloc Québécois will press the Liberals to include their priorities in the next federal budget and use that as a jumping-off point for an election once prorogation ends on March 24.

If the Conservatives secure a majority, as recent polls suggest they will, they would have the ability to reduce the size of government, restore fiscal balance and cut taxes, he said.

Other leading priorities include axing the carbon tax and cutting immigration.

• Email: gmvsuhanic@postmedia.com

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