It’s quite a challenge to conventional thinking but Stéfane Marion is optimistic about the upcoming federal budget, even though he predicts the deficit will hit $100 billion.
The chief economist of National Bank Financial has been a vocal critic of what he calls the “Made in Canada sub-optimal policies” that led to a “lost decade.”
In a series of research notes, he has detailed meticulously the results of federal government policy: stagnating GDP per capita numbers; capital stock levels in manufacturing that are no higher than when NAFTA was negotiated in 1990; the addition of layers of regulation (there are now 320,000 regulations impacting companies, 110,000 in the manufacturing sector alone); and, an absolute drop in factory output, despite 30 per cent population growth.
Marion said the ongoing erosion of investment has seen Canada fall out of the top 20 in the international competitiveness league completely, from the number five position, the only G7 country absent.
“We talk about a Canadian productivity problem but really we have an investment problem. There is no precedent for investment stagnation for a decade,” he said.
Despite all of those structural problems, Marion is confident his “Make Canada Investable Again” campaign is gathering momentum.
“I’m the most optimistic I’ve been in a decade about our economic outlook,” he told me, citing the Carney government’s throne speech in April. It pledged Canada will be one of the G7’s leading economies and an energy superpower; that it will innovate and optimize immigration policy; and that it will reform and reduce regulation.
“That was a major break with the previous decade,” Marion told the Bloomberg Canadian Finance Conference in New York on Tuesday.
Since then, the Carney government has pledged to invest five per cent of GDP in defence by 2035. “I strongly believe that is a game-changer in our relationship with Washington,” Marion said, suggesting it will act as a “multiplier” when it comes to economic growth.
He urged Canada to use its comparative advantages — cheap and clean electricity and natural gas that costs half of what it does in the U.S. — to be part of the re-industrialization process in North America.
To that end, Marion called the upcoming budget, the most consequential in a generation. His prediction that the deficit will come in at $100 billion — higher than the $70 billion consensus and more than double the $42 billion the government predicted last December — is based on his experience working in the Finance Department.
“When you have a new minister of finance, if you are going to do risk management, you do it in the first year. If there is uncertainty, you make it show this year, so that next year you can deploy policy to improve on that,” he said.
More important than the size of the budget shortfall is what the government does with it, Marion said. He said Prime Minister Mark Carney cannot afford to spook investors who hold 40 per cent of the country’s bonds. “How do you convince investors to keep with the Canadian thematic?” he asked. “It will be a stimulative budget but there has to be a big investment component that encourages investors about the future outlook.”
While shocking, $100 billion would be three per cent of GDP, so half that of the U.S. deficit, and would provide stimulus for growth in 2026. “A $70 billion deficit might be too conservative, given the uncertainty,” he said. “You want to show improvement next year.”
The economist is not alone in his counterintuitive bullishness on Canada. Stock markets in Canada are up 20 per cent this year, higher than U.S. equity indices at 13 per cent and double the increase in European indices, according to market analysis firm MSCI.
Marion said the S&P/TSX index is trading at 17 times earnings, a level not seen in a decade, and has narrowed its discount on the S&P 500, which trades at 22.4 times earnings. It was only last February that the TSX was trading at the biggest discount in Canada-U.S. history.
“I’m not the only one who is optimistic,” he said. “Now we need to deliver.”
Precisely. The market is trading on hope, a commodity that has been in scarce supply in recent years. If the budget is a let-down, it will disappear like snow in a river.
