The Trump administration is once again considering tariffs on Canadian aluminum imports unless the Government of Canada imposes export restrictions. The increased protectionism risk is discouraging given that the revised free trade deal CUSMA is set to come into force on July 1. Any trade restrictions will pose additional economic costs on two economies that are already undergoing considerable weakness. Given that, the impacts would be negative for both nations; this development highlights the elevated political risks during the recovery that we have been flagging for some time.
US personal income fell by 4.2 percent in May. The CARES Act cheques boosted income in April, so a pullback in May was anticipated. Other government income support measures are still supportive, such as $980 billion in unemployment benefits. Spending rose 8.2 percent in May but was below market expectations for a gain of 9.0 percent. Personal savings remains high, but the savings rate declined last month. The price of consumer expenditures was up 0.1 percent last month, 0.5 percent year-over-year. Given the rising infection rates and the eventual scaling back of government income support, the outlook is for a slow recovery in personal consumption, which will constrain economic growth and limit any pick-up in prices.
Yesterday, Fitch downgraded the Government of Canada credit rating to AA+ from AAA. The market took the news in stride. It is not clear if S&P and Moody’s will follow Fitch’s decision. We keenly await the July 8 Fiscal snapshot for the official update on the estimated size of the deficit for this year. I suspect a legacy from the current crisis will be a broad swath of credit rating cuts to governments around the world, so the international benchmark for sovereign debt is likely to lower. Altogether, Canada’s fiscal position should continue to compare favourably relative to other advanced economies.
North American equities declined on Friday in reaction to the United States setting a new record for a one-day increase in COVID-19 cases, the decision of several states to either rollback or pause further reopening and increasing concerns about a second wave leading to a potential new lockdown. US bank stocks originally jumped higher on easing of certain aspects of the Volker rule but fell later in the day as the Federal Reserve decided to announce limits to dividend payments and barred share repurchases until at least the fourth quarter of this year.
