FXStreet (Delhi) – Sebastien Galy Macro strategist at Deutsche Bank, suggests that the Canadian growth in 2016 should see little benefit from a promised expansion of fiscal policy under a newly elected Liberal majority and the past fiscal tightening should continue to drag on the economy before the net fiscal impulse turns positive in 2017 to the tune of around 0.4%. Key Quotes “The fiscal impact on the Bank of Canada policy setting is hence limited. The Bank is likely to stay on hold for a considerable amount of time, turning more dovish when the CAD rallies and waiting for US exports to continue recovering.” “Liberal victory reduces fiscal tightening: The liberals won a decisive majority in the Federal elections after a period of great uncertainty. The vote provides a mandate for fiscal expansion inclusive of an average 4.2bn in infrastructure spending over the next four years and tax cuts for the middle class at the expense of top earners. The impact of all the measures is estimated by our economists at roughly 0.3% in 2016 and 0.5% in 2017/2018 as infrastructure projects are slow off the ground. It is too early for precise estimates as the budget will likely be decided only in Q1. This projected fiscal expansion will be fully offset by a tightening of the cyclically adjusted general government balance estimated at -0.4% in 2016 in the IMF Fiscal Monitor Table A3. The fiscal impulse should then turn positive to 0.4% in 2017 when the IMF expects a fiscal drag of -0.1%.” “Bank of Canada still reliant on a weak CAD: As the net fiscal impulse will take a long time to build up, the Bank of Canada is still reliant on a weak CAD to keep the CPI close to target. Over time a weak CAD and decent US growth should increasingly help the Canadian economy. This suggests the Bank of Canada’s stance will turn increasingly dovish if the CAD rallies until Canada gains enough traction from domestic and US consumption. In the short-term, the Bank of Canada is faced Friday with a CPI falling potentially below its lower bound target of 1% on lower oil prices while its labor market data was mixed.” For more information, read our latest forex news.