By Michael O’Neill

Has Canada hit bottom yet?

The President of China Xi Jinping who oversees the world’s second-largest economy, once called Prime Minister Justin Trudeau” Little Potato.” While some might view this as is a term of endearment,  historically, Chinese society has often used such labels to mock, ridicule, criticize, or highlight perceived weaknesses.

More recently, the incoming US President and the ruler of the biggest economy on the planet referred to Trudeau as the “Governor of the Great 51^st state.”

 How much further can a country’s global stature and influence decline before it becomes an afterthought in discussions among leaders of developed nations?

We’re about to find out.

Canada’s global standing has deteriorated dramatically since its Golden Era of Influence between 1945 and 1960. Back then, Canada was a force to be reckoned with and a founding member of NATO. Prime Minister Lester B Pearson won the Nobel Peace Prize for his role in resolving the Suez Canal crisis in 1956.

However, Canada’s influence began to wane in the 1980’s with the end of the Cold War. Conservative Prime Minister Brian Mulroney reduced the country’s military presence in Europe and cut military spending. The slide accelerated when Liberal Prime Minister Jean Chretien took office. He slashed military spending. Starting in the 2006, Canada had become irrelevant. It failed to secure a seat on the UN Security Council in 2006, 2010, and 2018. Apparently, UN voters believe that countries like Algeria, Ecuador, Guyana, Malta, and Slovenia have more to offer than a nation led by a “Little Potato Governor.”

Fall Out Boy or Boy, Will There be Fall-out.

Donald Trump plans to make a mockery of free trade agreements in a quest to bring jobs and manufacturing back to America. On December 8 he told NBC news that “I’m a big believer in tariffs. I think tariffs are the most beautiful word…. It’s going to make us rich.”    He bragged (joked) that within 15 seconds after threatening to slap a 25% levy on products from Canada, Trudeau was on a plane to Mar-a-Lago.”

Canada’s trade reliance on the U.S. is staggering—20 times more in dollar volume than its second-largest trade partner, China. Meanwhile, exports to China are double those to Canada’s third-largest trade partner. With Trudeau’s shaky reputation among leaders of these top trading nations, Canadian negotiators are starting at a disadvantage, and Canadians will pay the price.

Tiff Knows Canada has Challenges.

The Canadian economy is in the dumpster. That is why the Bank of Canada (BoC) cut its benchmark rate to 3.25% today from 3.75% in October. It is the second consecutive 50 bp cut and incontrovertible evidence of domestic economic malaise.

The proof is in the pudding or in this case, the monetary policy statement. Governor Tiff Macklem noted that the Canadian economy grew a mere 1% in the third quarter, which was well short of  BoC projections, and the prognosis for the fourth quarter doesn’t inspire confidence. Business investment is languishing, inventories are shrinking, and exports are down. In other words, the heavy lifters of economic activity have all decided to take an early Christmas vacation.

The labor market is sluggish, Unemployment jumped up to 6.8% in November, a sobering reminder that job creation isn’t keeping pace with the growing workforce.

Meanwhile, the government’s overdue move to lower immigration targets is expected to drag growth down further. The economy is operating below its potential, with excess supply indicating idle resources. If that’s not enough, the looming threat of U.S. tariffs casts another shadow over an already shaky outlook.

Finance Minster Freeland isn’t Helping.

The Finance Minister is making Tiff’s job harder. She announced that “In next week’s fall economic statement (December 16), you will see that the government is maintaining its fiscal anchor. Specifically, reducing the federal debt as a share of the economy over the medium term.”  It’s a good thing she isn’t Pinocchio.

Canada’s fiscal anchor, more cork than steel, leans on the dubious debt-to-GDP metric. Smarter countries like New Zealand and Norway use net debt-to-GDP, which excludes assets like FX reserves and pension funds. The U.S. flirts with fiscal gap analysis to account for future liabilities. These frameworks focus on long-term sustainability and transparency, areas where debt-to-GDP alone fails miserably. When asked about hitting deficit targets, Freeland served up a word salad about the importance of being clear to Canadians, but obviously not to the reporter.

Stuffing the Loonie

FX traders weren’t surprised by the BoC rate cut or Ms Freeland’s fiscal fairy tale narrative. They have been selling Canadian dollars since the beginning of October and they see no reason to change course. The technicals point to a sharply higher USDCAD with 1.4500 a likely target if Trump slaps a 25% tariff on Canadian goods on the day he takes office. Little Potato Governor’s objection’s will be ignored.