With balanced budgets on the horizon, Fitch Ratings has affirmed its ratings on Canada at ‘AAA’, with a stable outlook.
The rating agency says that it believes that the federal government is in a good position to achieve its balanced budget goal in 2015-2016, “barring a significant negative economic shock”. Fitch is forecasting economic growth to average 2.3% during 2014-2016, although it says that the risks are on the downside, “as consumption growth has moderated and global economic prospects are uncertain.”
It also reiterates that high household leverage “poses the biggest threat of adverse shocks to Canada’s economy as it is more susceptible to market stresses like unemployment or interest rate increases.” And, it suggests that the Canadian government could take further steps to mitigate some of the risks to the housing market, if the measures taken so far prove to be insufficient.
Economic growth continues to be “moderate”, Fitch notes; adding that the rebalancing of growth drivers from consumption and construction towards capital investment and exports has taken longer than expected. “Canada’s economic performance has been adversely impacted by the slower U.S. growth although structural impediments and lagging competitiveness are also hurting Canadian exports. Rising external demand and exports would be important to get a renewed boost for investment,” it says.
Among other things, the rating assumes that the eventual increase in U.S. interest rates will proceed in an orderly manner, that China will avoid a hard landing for its economy, that the domestic housing market will achieve a soft landing too, and that the Canadian government “will remain proactive and pragmatic in its approach to address macroeconomic and banking sector vulnerabilities.”