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Canada Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 33 pages

Core Views

We are mindful of significant uncertainty facing Canada's economyin the next few years, as a patchy US recovery and a high relianceon oil-related investment point to considerable economic headwinds.Canada's Liberal Party government will struggle to maintain its reformmomentum over the coming years.Major Forecast ChangesWe have lowered our policy rate forecast to 1.00% from 1.25% byend-2017, as the central bank will be mindful of heightened globaleconomic uncertainty.We have revised up our average exchange rate forecast to CAD1.30/USD from CAD1.34/USD in 2016 and CAD1.29/USD from CAD1.34/USD in 2017 after upward revisions to our oil price outlook.

Table Of Contents

Canada Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Elevated Uncertainty Could Delay Economic Rebalancing..8
We are mindful of significant uncertainty facing Canada's economy in the next few years, as a patchy US recovery and a high reliance
on oil-related investment point to considerable economic headwinds. This could delay the ongoing rebalancing of the economy and hurt
Canada's growth prospects.
TABLE: GDP BY EXPENDITURE (CHAINED 2007 PRICES), SAAR %.8
Provincial Migration. 10
Demographic Shift Favours Growth Outlooks In BC And Ontario.10
Shifting interprovincial demographic trends will favour economic growth in the provinces of British Columbia and Ontario. At the same
time, increasing demand for housing in the metropolitan areas of Vancouver and Toronto will also support the housing sectors at a time
of elevated prices, mitigating the risk of a sharp decline in housing prices.
GDP By Expenditure Outlook. 11
TABLE: GDP GROWTH FORECASTS.. 12
TABLE: PRIVATE CONSUMPTION FORECASTS.. 12
TABLE: GOVERNMENT CONSUMPTION FORECASTS 12
TABLE: FIXED INVESTMENT FORECASTS. 12
TABLE: NET EXPORTS FORECASTS.. 12
Fiscal Policy And Public Debt Outlook 13
Limited Long-Term Implications From Expansionary Budget..13
The Liberal Party government's expansionary fiscal policies will result in a widening of Canada's fiscal deficit, which it will not be able to
balance ahead of the 2019 election, despite pledging to do so. This will see Canada's total public debt climb in absolute terms, but steady
economic growth will bring the share of public debt to GDP below 30% in the long term.
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.. 13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..14
External Trade And Investment Outlook. 14
Low Commodity Prices Will Reshape External Accounts14
The sharp drop in prices for Canada's principal export commodity - hydrocarbons - will continue reshaping the external accounts, as
a weakened exchange rate will gradually see a rise in non-commodity goods exports. While this will ensure broad-based stability in
Canada's external accounts, we note that a high reliance on portfolio investment flows to finance the current account deficit leaves it
vulnerable to shifts in investor risk perceptions.
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..15
TABLE: TOP FIVE GOODS IMPORTS IN 201416
TABLE: TOP FIVE GOODS EXPORTS IN 2014..16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS16
Monetary Policy.. 17
BoC To Err On Side Of Caution In 2017..17
Monetary tightening in Canada will proceed more gradually than previously anticipated on account of heightened external economic
uncertainty, especially following the UK's vote to leave the EU. We have lowered overnight rate forecasts, seeing a slower hiking cycle
commence in 2017.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS.18
Currency Forecast. 19
CAD: Additional Upside Potential Firmly Limited.19
The rebound in the Canadian dollar has played out alongside the recovery in oil prices. We see limited scope for additional appreciation
for the exchange rate over the coming months, and caution that near-term volatility stemming from the UK's vote to leave the EU, could
see key levels of support for the currency retested.
TABLE: BMI CURRENCY FORECAST.. 19
Chapter 2: 10-Year Forecast. 21
The Canadian Economy To 2025. 21
Structural Factors Will Constrain Growth..21
Canada has several structural strengths that will work in its favour over the coming decade, including an enviable fiscal situation, a
well-educated workforce, and a good business environment. However, growth will be constrained by other structural factors, including
deteriorating demographics, the end of the global commodity boom, and household deleveraging. We forecast average long-term real
GDP growth of 1.8% to 2025, compared with 2.9% in the decade preceding the 2008-2009 global financial crisis.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 21
Chapter 3: Political Outlook. 23
SWOT Analysis 23
BMI Political Risk Index. 23
Domestic Politics.. 24
Next Phase Of Reforms: Major Challenges Ahead..24
Having successfully passed key legislation since coming into office, Canada's Liberal Party government will struggle to maintain
its reform momentum over the coming years. A challenging economic environment and the controversial nature of the Trudeau
government's remaining campaign pledges, especially relating to electoral reform, could see the administration expend its political
capital and draw increasing criticism from the public.
TABLE: POLITICAL OVERVIEW.. 24
Long-Term Political Outlook.. 26
Strong Foundation, But Some Challenges From Within..26
Canada has one of the highest long-term political risk indices in the world, reflecting its history of stable governance and strong
institutions. Nevertheless, Canada faces political challenges over the coming decade, including a potential shift in power from east to
west.
Chapter 5: BMI Global Macro Outlook 29
Global Macro Outlook. 29
Brexit Risk Casts A Long Shadow..29
TABLE: GLOBAL ASSUMPTIONS.. 29
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 30
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 31
TABLE: MACROECONOMIC DATA and FORECASTS. 33

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