Global Investment Strategy

GIS October 24 (Expect More Stimulus)

Date: 2016-10-23 - Prepared by: The GISI

The only factor that can considerably push up interest rates―at this stage of the cycle―is much higher government spending. The only country that has so far delivered this increase in government spending is Canada. It is, therefore, important to observe how this impacts Canadian stocks and bonds before inferring potential consequences on other economies.

Canada’s current government was elected in late 2015, with a clear promise of substantially higher government spending. They now have the mandate to deliver that spending. The first leg of the fiscal stimulus was implemented in early 2016. 

Last week, Bank of Canada indicated that the first impact on the economy will be felt in late 2016. This stimulus is expected to add 1.0% to Canada’s real GDP growth in 2016 and 2017. Let’s see if it actually does.

Canada’s case is especially important for Britain because these two countries are so similar. The British government is about to deliver a considerable fiscal stimulus. The British government controls the legislative and the executive bodies, similarly to the Canadian government. 

If Canada’s GDP does indeed accelerate, other G-7 governments―especially Britain―will follow. If Canada’s GDP doesn’t accelerate, we will need to question our conviction that fiscal spending has higher multiples and hence a bigger impact on economic growth.

The Fed Chair Janet Yellen gave a very important speech on October 14 in Boston. Her points went unnoticed because of (a) US presidential elections, (b) its somewhat academic content, and (c) investors’ unwillingness ...

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