Canada’s weak economic performance thus far in 2015 highlights some long-standing challenges for an economy that’s heavily dependent on resources and U.S. trade, among other concerns, suggests Fitch Ratings Inc. in a new report.
A technical recession is now likely for Canada after Statistics Canada reported that real gross domestic product (GDP) declined by 0.2% in May, the fifth consecutive monthly fall in Canada’s GDP, the New York-based credit-rating agency declares. This follows a GDP contraction in the first quarter, “largely due to the negative impact of lower global energy prices on business investment and stuttering first-quarter U.S. growth.”
The Fitch report says that it’s not expected that the recession will deepen or broaden. Rather, with the labour market holding up and a U.S. recovery developing in the second quarter, the firm expects to see a return to growth for Canada in the second half. Furthermore, it still expects the Canadian economy to expand over the course of the full year.
Nevertheless, the report also notes the weakness that has been recorded so far this year illustrates how “high commodity dependence, narrow diversification of trade partners and the slow shift from consumption and construction to capital investment and exports as growth drivers carry risks to growth.”
In addition, the Fitch report says that high household leverage “presents a significant potential shock to the Canadian economy,” noting that the firm also continues to believe that house prices are approximately 20% overvalued on a national basis. “We think the authorities will remain proactive in addressing macro-prudential risks, making a soft-landing in the housing market possible.”
Finally, the Fitch report observes that this year’s economic weakness is having a minor fiscal impact at the federal level. And whether the federal government returns to surplus in the current fiscal year or the following one, Fitch says it believes “the improving trend is intact.”