Canada: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant and diversified energy and mineral resources
- World’s fifth largest oil and gas producer
- Robust banking sector, well capitalised and rigorous supervision
- Serious nature of the budget
- Direct proximity with large US market
- All-out development of trade relations (CETA with the EU)
- Excellent business climate
- Dependent on US economy (half of FDI stock, integration of both countries’ automotive industries) and on energy prices
- Loss of competitiveness by manufacturing enterprises associated with weak labor productivity
- Inadequate R&D spending
- Decrease in the labor force, just slowed down by large-scale selective immigration
- High levels of household debt (165% of disposable income) / very high house prices
- Weakening energy exports due to inadequate supply pipelines to the United States and the US’s own resources
Towards Moderate Growth
After progressing strongly in 2017, in connection with the boom in consumption and the recovery of business investment, activity is expected to settle at a pace closer to its growth potential estimated at 1.6%, with a significant gap remaining between the Atlantic Provinces and the rest of the country. Household spending is expected to lose steam. Real disposable incomes and jobs will not rise as fast and the effects of income tax cuts and higher transfers to the middle and lower-income households in 2017 will dissipate. Settling property prices (excluding the regions of Vancouver and Toronto where prices will continue to rise) will dampen the wealth effect sparked by surging prices in the last two years. Credit, although still cheap, could get more expensive, if the central bank raises its key rate (1% in December 2017), which it could decide to do given the increased inflationary pressures and near full employment. Residential construction could taper off, especially because new prudential regulations are due to be adopted on credit in order to ease the pressure on the market and strengthen the banks. 45% of outstanding credit awarded by the six largest banks, which account for 93% of the banking industry’s assets, relate to property and over half of borrowers are not insured. Against this, business investment is expected to remain robust due to growing capacity constraints, firm hydrocarbon prices and a still strong credit environment. The increase in corporate profits, even if slower than in 2017, should point in the same direction. Public investment in transport, renewable energy, housing, and early childhood is expected to remain firm in the context of a still fairly accommodative fiscal policy, especially since a public infrastructure investment bank has just been set up. The contribution of external trade to growth will be weak. While exports of energy (hydrocarbons and electricity), metals (gold, aluminum, copper, iron, nickel), agricultural products (oilseed crops, cereals, meat, legumes) and shellfish will continue on a steady upward trend, especially in terms of price, other exports (vehicles, engines, automotive components, planes, polymers, medicines, paper) are expected to benefit only moderately from healthy world demand and a Canadian dollar which has appreciated along with oil prices but is still relatively under-valued against the US dollar. This needs to be set against the loss of manufacturing competitiveness which coincided with the period of high oil prices. Meanwhile, timber exports will continue to be hit by countervailing duties applied by the United States. The end to renegotiations over NAFTA and the possible negative repercussions are unlikely to happen until 2019.
Low Public Deficit, Significant Trade Deficit When Excluding Energy
While public debt (40% federal, 60% provincial or local) accounts for almost 100% of GDP, the modest nature of the public deficit, moderate growth and low interest rates will suffice to stabilize it. Moreover, thanks to its low cost due to its triple A rating, it is perfectly sustainable, especially as net of financial assets held by the federation and the Canada and Quebec pension funds, it accounts for just 28% of GDP. Quebec and Ontario are the two most indebted provinces, with 80% of net provincial debt and a share of their respective GDP of 47% and 38%. But they represent 60% of Canadian GDP and population and will maintain a cautious fiscal policy with a fiscal balance close to equilibrium.
Energy exports do not suffice to offset the significant deficit in trade of other goods (5% of GDP). The services deficit and investment income deficit (ca. 1% of GDP each) come on top of the trade deficit (1% of GDP). Given that investments abroad are higher than FDIs, financing the current account deficit relies on foreign portfolio investments. The result is growing external debt (115% of GDP in 2016), mainly contracted by banks and businesses - a reflection of inadequate domestic savings.
Proactive Prime Minister Justin Trudeau
Justin Trudeau was sworn in as Prime Minister of Canada following the October 2015 parliamentary elections, succeeding the Conservative Stephen Harper, who had been in post for almost ten years. Mr Trudeau’s (center-left) Liberal party won 184 of 338 seats in parliament, giving it an absolute majority. The focus was quickly put on inclusive growth with tax cuts for the middle classes, higher family benefits and the development of environmentally-friendly infrastructure. However, this did not prevent the government from supporting the Trans Mountain Pipeline Project between Alberta and the Pacific coast. Differences with the United States have multiplied on diplomatic and trade issues (timber, aeronautics, dairy products), resulting in a move to strengthen ties with other countries, as in the trade agreement between Canada and the EU, signed in late 2016. The Prime Minister also aims to reduce obstacles to trade between the country’s ten provinces where non-tariff barriers are still hampering the circulation of goods, capital and people.