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Canada Country Risk Report Q1 2017

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

Core Views

Oil production declines and weak non-commodity exports to the US, where we have recently lowered our real GDP growth forecast, will see economic growth in Canada slow. Concerns over economic growth and jobs could hurt the Liberal's reelection prospects in 2019, as emphasis on social and environmental policies could be seen to undermine efforts to support provincial economies. Canada's central bank will begin gradual monetary policy normalisation in 2017, as economic activity starts to recover. Recovering oil prices will support Canadian dollar appreciation against the US dollar over the remainder of 2016 and in 2017. Major Forecast Changes We have lowered our real GDP growth forecasts for Canada from 1.4% and 2.0% to 1.0% and 1.5% in 2016 and 2017, respectively. We have lowered our end-year consumer price inflation forecasts from 2.0% and 2.2% to 1.3% and 1.8% in 2016 and 2017, respectively.

Table Of Contents

Canada Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Wildfires And Poor Manufacturing Prompt Growth Revision, Housing Risks On The Rise....................................................8
Unexpected oil production declines and weak non-commodity exports to the US, where we have recently lowered our real GDP growth
forecast, will see economic growth in Canada slow to 1.0% in 2016 and reach just 1.5% in 2017, down from our previous forecasts of
1.4% and 2.0% respectively. Our latest forecast revisions also reflect increasing uncertainty stemming from efforts by the government
and central bank to cool the housing market, which has become the primary engine of economic growth.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE : NET EXPORTS FORECASTS...................................................................................................................................................................10
Monetary Policy........................................................................................................................................................ 11
Policy Normalisation Ahead, But Deleveraging Risks Loom Large.........................................................................................11
Canada's central bank will begin gradual monetary policy normalisation in 2017, as economic activity starts to recover. However, with
inflation low and concerns over high household debt levels looming large, we see considerable downside risks to our forecasts, in the
event that a period of household deleveraging sets in over the next two years.
Monetary Policy Framework.................................................................................................................................... 12
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................12
Currency Forecast.................................................................................................................................................... 13
CAD: Oil Price Recovery Will Support Moderate Appreciation.................................................................................................13
Recovering oil prices will support Canadian dollar appreciation against the US dollar over the remainder of 2016 and in 2017. However,
increasing concerns over Canada's growth outlook and the prospect of only a modest hiking cycle by the Bank of Canada - with notable
downside risks - will limit major upside over the coming year.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................13
Structural Fiscal Position........................................................................................................................................ 15
Limited Long-Term Implications From Expansionary Budget..................................................................................................15
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.............................................................................................................................15
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................16
Outlook On External Position.................................................................................................................................. 16
Low Commodity Prices Will Reshape External Accounts.........................................................................................................16
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 leave it
vulnerable to shifts in investor risk perceptions.
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................17
TABLE: TOP 5 GOODS IMPORTS..........................................................................................................................................................................17
TABLE: TOP 5 GOODS EXPORTS.........................................................................................................................................................................18
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................18
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 are forecasting average long-term
real GDP growth of 1.7% to 2025, compared with 2.9% in the decade preceding the 2008-09 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
Economic Challenges Could Test Liberals' Reform Commitment...........................................................................................24
Concerns over economic growth and jobs could hurt the Liberal
Party's re-election prospects in 2019. The fiscal implications of a more generous social benefits system and weaker economic growth
could restrict the government's ability to respond to a more difficult economic growth environment, especially if a housing market
correction is triggered and federal government guarantees undermine Canada's sovereign credentials.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................24
TABLE: GOVERNMENT EFFORTS TO COOL HOUSING MARKET......................................................................................................................25
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 4: BMI Global Macro Outlook................................................................................................... 29
Global Macro Outlook.............................................................................................................................................. 29
Broad Recovery But Three Notes Of Caution.............................................................................................................................29
TABLE: GLOBAL FORECASTS, 2015-2020........................................................................................................................................................... 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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