Paul Martin's Liberal Party won a minority government in yesterday's general election. Investors, currency traders, bond traders — the whole lot of them — didn't seem much interested. Here's a sampling of reaction from some Bay Street economists:
Andrew Pyle at Scotia Capital:
Canadian Prime Minister Paul Martin pulled off a rabbit-out-of-the-hat trick that would have made Harry Potter proud, as the Liberals defied the pollsters and formed a comfortable minority government in Canada . . . Some fiscal erosion emanating from a coalition government might follow in the year-ahead, simply because of the diverse fiscal agendas and political objectives of the political pairings. However, given policy lags, not to mention the precarious nature of minority governments, spending initiatives would likely unfold slowly. A commensurate reaction from monetary authorities would likely only evolve over time, not immediately. Similarly, the Bank will approach any near-term currency volatility in a cautious fashion, if at all. In fact, in a recent speech, Governor Dodge noted that central banks should avoid smoothing “unnerving” short-term currency volatility. Simply put, a minority government should not hinder (1) Canada/US spread compression and (2) or the longer-term CAD appreciation trend.
Robert Spector: Merrill Lynch Canada
Given that the financial markets had largely priced in a minority government, we don't expect any major near-term movements in FX or fixed-income markets. Over the medium term, however, we continue to be mindful of two factors regarding minority governments in Canada. First, historically, minorities have lasted roughly 18 months, and there is the potential for some volatility in currency and bond markets related to this outcome, particularly since at the margin, it represents a movement to the left.
Secondly, political factors rarely dominate movements in Canadian financial markets— the dominant macro trend of the day will largely govern.
Douglas Porter: BMO Nesbitt Burns
This will likely lead to an increased reliance on issue-by-issue coalition building as NDP support will not be enough to ensure the confidence of Parliament. Canadians are likely to head back to the polls within a year. Before that, left-wing issues will predominate in the forthcoming Parliamentary session—health care, municipal finance, the environment—but fiscal policy might not loosen as much as it would under a Liberal minority solely propped up by the NDP. Although there is no majority government, Canadian markets will be relieved by the results. Bonds won’t face pressure from as large a ramping up of government spending and the Canadian dollar should face less uncertainty of a deadlocked House.