2017: Policy Pivot?

Almost two weeks into the New Year, and the good wishes have morphed into plans, refreshed goals and objectives, and aspirations for what’s ahead. There’s always something nice about starting with that fresh, blank sheet of paper. In the past couple of years, Canadian exporters have had good cause for optimism in the early going; is it the same for 2017?

In terms of immediate growth opportunities, data suggest a loud ‘Yes’. Key drivers of our top customer’s economy are nothing if not impressive. America’s job market remains hot: December payrolls posted an impressive gain, the unemployment rate is about as low as it ever gets, wages are surging, and as a result US consumers are happier than they’ve been in at any point in the post-recession period. With both higher public spending and tax cuts in the offing, things could heat up more. Business is still dealing with tight domestic capacity constraints, and has every reason to gear up investment projects.

Across the pond, the same is generally true for Western Europe. True, there’s still a lot of structural stuff to worry about – bank solvency, precarious public finances, voter discontent and the like. But these are long-standing issues that have had multiple and much more potent opportunities to clobber the economy, and in each case, Armageddon was avoided. Even Brexit, an existential threat to today’s European economic structure, has failed to zap the Zone, against certain high-profile predictions. It suggests that the groundswell of pent-up demand that has slowly but steadily built up in the post-recession years is not just keeping the economy going, but holding out hope for a growth acceleration in the near term.

There’s also good grist for optimism in Canada’s export data. Stats for late 2016 show the year ending with a bang, with 10 of the 11 major industry groupings posting impressive growth in November. In addition, growth was spread nicely across our various global customers. Non-US markets were particularly strong, while the US itself put in an impressive performance. If sustained, this will set up exporters for a very decent 2017.

Sounds like that blank sheet is already pretty full, in the very best sense. Not so fast – the part of the sheet that’s still pretty clean is more than a little concerning. If 2016 was marked by a populist pivot away from trade openness (see last year’s final Commentary), then the world is still waiting with bated breath to see whether there will be a corresponding policy pivot. In the case of Brexit, policy moves have been hamstrung by a legal debate on due process. Article 50 may well have to wait for parliamentary approval, throwing the true referendum outcome into limbo. In the US, all we have to go on is an electoral college vote, nominations for key posts, and a bevy of tweets. While the banter does seem to have initiated changes to key cross-border investment projects – mostly affecting Mexico – the protectionist drift runs counter to economic logic, and if it becomes a tide, will definitely have a negative impact on the average American. Actual policy moves are still a monstrous near-term question.

Where does this leave us? Businesses everywhere are in a state of limbo. Without clear policy directives, commitments to large investments become problematic. Those facing the moment of decision are most likely to delay until there’s greater clarity – impacting everyone in the entire value chain. Others are being more decisive, walking away from key projects in anticipation of coming policy directives. This is a hefty gamble, and suggests a general mood in the business world we are labelling the ‘Great Hesitation’. While some of the current shifts make perfect sense, in all similar circumstances there is usually a herd mentality that provokes an overreaction that in many cases makes little sense. It’s in these decisions that there’s potentially a lot of opportunity. Given the latent strengths of the world’s engine economies, businesses engaged in searching out the gems from which others are fleeing may well latch on to this cycle’s best opportunities.

The bottom line?

What businesses now face is a post-plebiscite policy vacuum. Given extant structural fragility, current policy-makers need quick wins to ensure that the fickle – and divided – masses stay with them. In this environment, what we are most likely to see is some stage-management, but not a full pivot. If so, there is opportunity in others’ project ash-heaps.

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