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FILE PHOTO: Canada's Finance Minister Bill Morneau takes part in a news conference in Ottawa, Ontario, Canada, July 18, 2017. REUTERS/Chris Wattie/File Photo

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By Andrea Hopkins

OTTAWA (Reuters) - Canadian Prime Minister Justin Trudeau's government has been badly shaken by a conflict-of-interest controversy about his finance minister, but the Liberal government's upcoming fiscal update offers an opportunity to reset the public focus on Canada's strong economy, political observers say.

The government has been plagued all week about questions about the finance minister, Bill Morneau, the multimillionaire former chief executive officer of human resources management firm Morneau Shepell. Some have questioned whether Morneau would be forced to resign.

The focus has been a rare stumble for Trudeau's government, which marked two years in office this month and has mostly manoeuvred its way out of political trouble partly because of Trudeau's personal popularity and the youthful momentum of the Liberals after 10 years of Conservative rule.

"They're politically very astute in a whole bunch of areas but in issues management and parliamentary management they seem to be ham-fisted," said Andrew Graham, professor at the school of policy studies at Queen's University.

With Trudeau's strong defence of Morneau, and the finance minister likely to unveil a smaller budget deficit in Tuesday's fall fiscal update, Liberals have a temporary chance to refocus on good news.

"Economic conditions are a bedrock of whether people feel good or bad about how politicians are performing, and the economy is doing very well for most people," said Abacus Data pollster Bruce Anderson.

Morneau said on Thursday he will put his assets in a blind trust and divest stock in a publicly traded family business. That comes after weeks of backlash over tax reform that has become a major obstacle for Trudeau's government.

Opposition parties from both the political left and right have seized on the ethics scandal, trying to tie Trudeau's team to what they say is an entitled Liberal Party that has previously faced corruption charges.

"The opposition has changed the focus from substance to ethics, and they won't let that go that easily," said Genevieve Tellier, a political professor at the University of Ottawa.

But Tellier said Trudeau's decision to fill his cabinet with political rookies - including Morneau - rather than turning to the old Liberal guard, could limit the ability of the opposition to land many ethical punches.

Moreover, Morneau is respected by markets.

"I think the prime minister would be very cautious about changing his finance minister. ... (Morneau) presents a reassuring image, he doesn't scare the markets," Tellier said.

Ipsos Public Affairs pollster Darrell Bricker put it more bluntly: "They really don't have a choice but to tough it out and hope some event will transpire to distract the hyenas."

The expected budget improvement in Tuesday's fall fiscal update could also give Morneau the leeway to woo voters with more spending or debt reduction.

"The way the numbers are playing out, they are in a fairly favourable fiscal position," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Morneau spokesman Dan Lauzon said the finance minister has no plans to change his strategy, and would keep focus on fiscal stimulus matters: "He is in this for the long run, and he won't let distractions get in the way."

(Reporting by Andrea Hopkins; Editing by Leslie Adler)

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