Canada: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant and diversified energy and mineral resources
- Fifth largest oil and gas producer in the world
- Strong, well-capitalised, and well supervised banking sector
- Serious budgeting
- Close proximity to large US market
- Developing trade relations with multiple partners (CETA with the EU)
- Dependent on US economy (1/2 of FDI stock, integration of the two countries’ automotive industries) and energy prices
- Loss of competitiveness of manufacturing companies due to low labor productivity
- Insufficient R&D expenditure
- Decrease in the labor force, just slowed down by largescale selective immigration
- High household debt (170% of disposable income); house prices very high, although stabilizing
- Energy exports weakened by inadequate supply pipelines to the coasts and the US, and by the US’s own resources
Growth Still Solid
Growth is expected to remain solid in 2019, despite the slowdown in domestic demand. Household consumption will show resilience thanks to the fall in the unemployment rate (5.8% in October 2018, the lowest in four decades) and the substantial wage increases boosted by growing recruitment difficulties. However, the wealth effect associated with the recent surge of house prices will be mitigated by their subsequent stabilisation. In addition, credit will continue to become dearer, reflecting the increase in the central bank's key interest rate (1.75% in October 2018, compared with 1% at the end of 2017), which is set to converge towards its neutral long-term level of between 2.5% and 3.5% amid almost full employment. As a result, residential construction, also affected by recent prudential rules aimed at limiting the risks associated with real estate loans, is expected to remain sluggish. Despite growing supply constraints, business investment will slow after a particularly dynamic 2018. It may even stagnate in the energy sector, particularly after the courts froze the USD 5.8 billion Trans Mountain pipeline expansion project on the west coast. As fiscal policy is less accommodative, the contribution of public consumption will be significantly reduced. Conversely, the contribution of foreign trade to growth should become positive. On the one hand, imports will follow investment in slowing. On the other, exports are expected to accelerate with the signing of the USMCA deal (renegotiated NAFTA) in September 2018, which ended uncertainty about future trade relations with the United States – a crucial partner, since it accounts for 76% of total exports. Conditions will remain unchanged for most sectors, with the exception of dairy products, where Canada has opened up 3.6% of its market to the United States. Despite this agreement, the United States’ decision to maintain customs duties on imports of steel (25%) and aluminium (10%) will continue to affect metallurgy in 2019, even though the sector will benefit from the safeguard measure (import control) that came into force in October 2018. Timber exports will also remain constrained by the 20% customs duties applied by the United States in January 2018. Other export sectors, such as energy, agriculture and automotive, are expected to rebound, despite the slowdown in the United States.
Prudent fiscal policy and significant current account deficits
The government will continue its prudent fiscal policy in 2019, despite it being an election year. The additional measures to promote business competitiveness are of limited scope (CAD 5.2 billion, or 0.2% of GDP). Meanwhile, revenues will remain supported by brisk activity. As a result, public debt will continue to decline slightly. Although higher than 90% of GDP, public debt (two thirds of which is provincial or local) is sustainable, particularly thanks to its low cost linked to the country’s AAA rating. Excluding the assets held by the Canada and Quebec Pension Plans, net public debt is only 28% of GDP. The most indebted provinces are Ontario and Quebec (49% and 30% of total net provincial debt respectively). However, when compared against their economic weight, this debt remains limited (38% and 47% of GDP respectively).
The current account will remain in deficit in 2019, although less so than in 2018, thanks to the smaller trade deficit. For several years, the balances of goods, services and income have been consistently in deficit. Excluding periods of soaring oil prices, as in 2014, energy exports only partially cover the substantial trade deficit in other commodities (4% of GDP), due to the sharp appreciation of the real exchange rate in the 2000s, which has been only partially corrected since. The current account deficit is financed by large foreign portfolio investments. The substantial external debt (105% of GDP in June 2018) is mainly contracted by banks (43% of the total) and companies (38%).
Prime Minister Trudeau expected to be re-elected
Justin Trudeau, who has been Prime Minister since the 2015 parliamentary elections, in which his center-left Liberal Party won an absolute majority (184 seats out of 338), will stand for re-election in October 2019. With less than a year to go before the elections, polls indicate a pattern relatively similar to 2015: just under 40% of the votes for the Liberal Party, which should have a good chance of maintaining an absolute majority. His main opponent will be Andrew Scheer, elected in May 2017 as leader of the right-wing Conservative Party, which governed between 2006 and 2015 and whose support in the polls remains at around 30%. The left-wing New Democratic Party led since October 2017 by Jagmeet Singh, is expected to remain the third largest political force on 15% of the votes after losing a little ground to the Green Party. Prime Minister Trudeau is therefore the favourite to win, even though his popularity rating has fallen during his time in office and stood at 48% in October 2018 compared with 64% two years earlier. At the regional level, growing differences with the United States have led to stronger ties with other countries, including the EU nations, with the CETA trade agreement signed in late 2016.