Canada: Risk Assessment

Country Rating¹

Rating: A1

Business Climate Rating¹

Rating: A1

Risk Assessment²

Economic rebound in 2010
The Canadian economy suffered in 2009 its first recession since 1991. Economic activity rebounded in 2010 spurred by expansionary fiscal and monetary. Private consumption and investment were the main growth engines with foreign trade making a negative contribution despite the rebound in raw material prices.

A slowdown in 2011 with less-dynamic economic activity in the United States
The growth slowdown of the late 2010 will likely continue in 2011 with the fiscal consolidation undertaken by authorities limiting private demand. Household consumption will thus be undermined by the very weak growth of wages and the virtual stagnation of disposable income. Heavily in debt (144% of disposable income), households will exercise prudence in their spending especially with the job market remaining sluggish. Residential investment will decelerate sharply, thus limiting the rise in housing prices. Conversely, companies will continue to resume investments postponed during the crisis. Therefore, the investment growth will again be substantial this year, particularly in the mining, energy, aerospace, chemicals and renewable energy sectors. The slowdown in domestic demand will result in a decline in goods and services imports, which will nonetheless derive support from the Canadian dollar exchange rate that encourages the purchase of capital goods abroad. Meanwhile, exports will likely decelerate sharply in phase with the less dynamic economic activity in United States, (75% of sales abroad). Trade balance is expected to show a substantial surplus and the current account deficit will tend to level off thanks to the revenues derived from raw materials. In this context, the tightening of monetary policy will likely be put on standby to limit the negative impact on exports and tourism of further appreciation of the exchange-rate. The Canadian currency could nonetheless still appreciate slightly against the US dollar. The public sector deficit will likely decline significantly, with the public debt stabilizing at around 80% of GDP.

A solid banking system with bankruptcies in decline
The solidity of the banking system constitutes a crucial strength of the economy. It coped relatively well with the crisis, and its capitalization has remained very satisfactory. By 2010, companies thus enjoyed easier access to bank loans and the credit situation is expected to ease even more this year. In 2010, the debt ratios of Canadian companies declined, and although their profits rebounded earnings remained below the levels prevailing before the crisis. The automotive sector will be weakened by the slowdown in household spending in the United States. Export industries, particularly wood and paper, will suffer from the Canadian dollar appreciation albeit partly offset by satisfactory price levels. in the property sector is expected to sag slightly amid weakening demand and rising interest rates late 2010, while the building and public engineering sector will benefit from greater public financing in the framework of public-private partnerships. Payment behavior has tended to improve as reflected by the significant drop in bankruptcies, down 27% in nine months through September 2010.

Strengths

• Structurally sound public sector finances and limited public debt
• Abundant and diversified energy resources
• Solid banking system and strict oversight
• Economic dynamism attractive to foreign direct investors

Weaknesses

• Strong concentration of exports geographically and by economic sector (US accounts for 75% of exports)
• Harsh climate
• International competitiveness weakened by the strong Canadian dollar
• High household debt
• Harshness of the climate