Canada Country Risk Report Q2 2020
Canada's economic growth will slow modestly in 2020 compared to 2019. While export growth will rebound modestly, gains will be undercut by slower growth in key export markets and continued transportation bottlenecks, weighing on the oil sector. Meanwhile, private consumption will face headwinds from gradually slowing job creation, and as elevated household debt loads continue to weigh on willingness to spend.
We expect the Bank of Canada will cut the benchmark interest rate by 50 basis points in 2020, bringing the benchmark policy rate to 1.25%.
Canada's fiscal deficits will narrow slowly over the next five years, with our forecasts now implying that the deficit will only drop below 1.0% of GDP in FY2024/25 (revised from FY2023/24). Prime Minister Justin Trudeau's efforts to fulfil key campaign promises will see increased social spending and green energy invest-ment. Moreover, the Liberal Party's need to make political compromises with the more left-leaning New Democratic Party, after Trudeau's Liberal Party failed to win a majority in the October general election, will further drive up expenditure growth.
On the downside, greater-then-expected delays to pipeline expansion plans would weigh significantly on oil export and production. We also cannot rule out a trade-related downside shock to global growth and commodity prices, which would adversely affect Canadian exporters.
Similarly, if the novel coronavirus (Covid-19) epidemic is more long-lasting than we anticipate, this could weigh on global commodity prices and growth, and feed through to weaker Canadian exports and fiscal revenues as well as exerting downward pressure on the exchange rate.
On the upside, it appears that global manufacturing growth may be stabilising. Stronger then expected growth in these markets could offer tailwinds to commodity prices and overall export demand.
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