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Canada Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 35 pages

Core Views

Canada's proposed tax changes and previous emphasis on publicinfrastructure investment during the Liberal Party's election campaignwill derail efforts to balance the federal budget by 2019 and see theruling party's self-imposed CAD10bn deficit cap breached.The impact of low oil prices on Canada's merchandise trade balancewill increasingly be offset by manufactured goods exports, pavingthe way for the current account deficit to narrow over the comingyears.

Canada's central bank will maintain the overnight rate at 0.50% until2017, when stronger economic growth will prompt the beginning ofa gradual interest rate hiking cycle.Major Forecast ChangesHaving previously forecast a balanced budget by 2016, we nowexpect the federal government's revised 2019 target for a balancedbudget to be missed. We project a 0.5% of GDP deficit in 2016, withthis rising to 0.8% of GDP by 2019.We have revised our current account projections for Canada after abigger-than-expected decline in oil prices, now forecasting a deficitof 3.1% of GDP and 2.7% of GDP in 2015 and 2016 respectively.We previously projected the deficit at 2.8% and 2.4% of GDP.

Table Of Contents

Canada Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Strong Exports Will See Economic Growth Accelerate8
Private consumption and goods export growth in Canada will offset the continuing decline in fixed investment and see real GDP
growth accelerate over the coming quarters Strong demand for Canada's manufactured goods amid a gradual restoration of economic
competitiveness through a weaker exchange rate will see investment in non-residential construction and machinery and equipment
begin to drive overall fixed investment higher after 2016
TABLE: GDP BY EXPENDITURE GROWTH FORECASTS8
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
TABLE: REAL GDP GROWTH FORECASTS, % 11
Fiscal Policy And Public Debt Outlook 11
Expansionary Policy Will See Fiscal Targets Missed11
Emphasis on tax breaks for middle-income families will derail the Liberal government's plans to cap the federal budget deficit
at CAD10bn over the coming years and balance the budget by 2019 Coupled with government commitments to step up public
infrastructure spending in the coming years, we see the budget moving into a deficit, though this will have limited implications for the
government's financing ability
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES 13
External Trade And Investment Outlook 14
Manufacturing Exports Will Shrink Current Account Deficit14
The impact of low oil prices on Canada's merchandise trade balance will increasingly be offset by manufactured goods exports, paving
the way for the current account deficit to narrow over the coming years
Outlook On External Position 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 15
TABLE: TOP 5 GOODS IMPORTS IN 2014 16
TABLE: TOP 5 GOODS EXPORTS IN 2014 16
TABLE: EXTERNAL COMPETITIVENESS INDICATORS 17
Monetary Policy 17
Gradual Hiking Cycle Will Begin In 201717
Canada's central bank will maintain the overnight rate at 050% until 2017, when stronger economic growth will prompt the beginning of
a gradual interest rate hiking cycle We forecast the overnight rate to climb to 125% by end-2017 and 200% by end-2018
Monetary Policy Framework 19
Currency Forecast 20
CAD: Additional Downside Will Be Limited Beyond Early 201620
Falling oil prices and rising interest rates in the US will keep the Canadian dollar under selling pressure in the coming months However,
with a considerable adjustment in the exchange rate having already taken place and the non-extractive sector economy stabilising,
additional downside will be limited beyond a six-month time frame
TABLE: BMI CURRENCY FORECAST 20
Chapter 2: 10-Year Forecast 23
The Canadian Economy To 2025 23
Structural Factors Will Constrain Growth23
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 18% to 2025, compared with 29% in the decade preceding the 2008-2009 global financial crisis
TABLE: LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
Challenging Policy Environment Amid Busy Reform Agenda26
The Liberal government of Prime Minister Justin Trudeau has been voted into office on an ambitious reform platform, for which it has a
strong mandate The economy will feature high on the agenda, while the Liberal government will navigate an increasingly challenging
foreign policy environment The effectiveness of new legislation will ultimately determine the Trudeau government's popularity in the
coming years
TABLE: POLITICAL OVERVIEW 26
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - ECONOMY and TAXES 27
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - SECURITY and TERRORISM 27
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - FOREIGN AFFAIRS and DEFENCE 28
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - ENERGY and ENVIRONMENT 28
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - INFRASTRUCTURE 29
TABLE: LIBERAL PARTY CAMPAIGN PLATFORM - ABORIGINAL ISSUES 29
Long-Term Political Outlook 29
Strong Foundation, But Some Challenges From Within29
Canada has one of the highest Long-Term Political Risk Index scores 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 31
Global Macro Outlook 31
Unfinished Business In 201631
TABLE: GLOBAL ASSUMPTIONS 31
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 32
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 32
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %33
TABLE: CANADA - MACROECONOMIC DATA and FORECASTS 35

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