May 2010



Title: Steady as she goes

Subtitle: The recent Canadian election results were greeted by a big yawn by the investment community.


The Conservatives win of a majority government earlier this month took many Canadians by surprise. Polls done in the weeks before the campaign showed few respondents had any idea that was possible.


True, the Tories led in almost all the surveys, but not nearly enough to lead experts to believe that they would win a plurality of seats in the House of Commons. However the Conservatives confounded everyone by turning out a more voters than expected in key ridings, and were able to swing a substantial number of key seats.


Now, with their newly earned majority, the Tories, whom Canadians had kept on a leash running minority governments, no longer need to compromise with other political parties to get legislation passed.


That means, like office workers, who, after years of maintaining a professional working relationship, accidently end up in bed together after a wild Christmas party, Canadians too, are about to see a whole new side of the Tories. The question is whether they will like what they will see.


Big government Conservatives

At first glance, the country’s stock markets for one didn’t seem overly impressed. When a right of center political party wins a majority government you’d expect the markets to react with glee. There are several reasons for this. Majority governments tend to be associated with stability, which is highly prized by investors say Derek Burleton, Sonya Gulati and David Tulk, economists with TD Economics in a recent note to the bank’s clients. “Investors generally dislike uncertainty and the outcome promises a stay-the-course policy path.”


Furthermore, right of center parties, like the federal Tories, tend to look out for business interests. For example the Tories will almost certainly implement major portions of the budget they tabled in Parliament before the election, such as those projecting a balanced budget by fiscal 2015-2016, targeted spending cuts and tax breaks for corporations.


However the reaction in equity markets was a big yawn. In the ensuing days, the S&P/TSX drifted down a couple of hundred points, though that was mostly as a result of weaker raw material prices.


Big government Conservatives

Part of the reason for the yawns says one expert, is that Canadian politicians are far more alike than they once were. “There will be no ideological transformation in Canada, as both parties have moved closer to the center,” notes Sherry Cooper, an economist with BMO Capital Markets. “Nothing much will change for Canada’s economy of the thrust of public policy.”


The best indication of Stephen Harper’s performance as a majority prime minister can be gauged from his past record. Like George Bush south of the border, our new prime minister has shown elements of being a “big government conservative.”


While small “c” conservatives tend to preach leaner government, according to Statistics Canada data (which differs slightly from the finance department’s numbers) spending by the Harper government increased by 20.56 percent in nominal terms between 2006, the year they took office, and 2010. That’s hardly libertarian conservatism territory


No news is good news?

That said, no major changes in Canadian economic policy would probably be good news. Canada has bounced back from the current recession far faster than the United States. In April alone the Canadian economy created 58,300 jobs, and the unemployment rate fell to just 7.6 percent. In fact employment in Canada is now back to pre-financial crisis levels. The housing market here has also vastly outperformed that in the US, which continues to search for a bottom after a significant plunge since the financial crisis.


The federal Conservatives claimed a lot of the credit for Canada’s strong economic performance. However experts note that the country, which is a substantial exporter of oil and other raw materials, benefitted from the strong recent upswing in commodity prices.


Furthermore, to the extent that the Conservatives get any credit for the recovery that occurred, they would almost certainly have to share part of it with the other political parties, which kept them on a short leash.


Now that the leash is off, Canadians will get their first real look at what Stephen Harper and the federal Tories are all about.



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