The Liberal government’s tone in its fiscal message will be important in the Throne Speech, he said. It’s likely to include words like prudent and responsible as a nod to the decades of effort to secure Canada’s triple-A debt rating that shouldn’t be cast aside after a short period of hardship.
“There’s been somewhat conflicting messages coming out of Ottawa in recent weeks. Some of the aggressive talk we heard in late August from the prime minister has been dialled back a bit. This might be not quite as revolutionary a Throne Speech as it looked like it might have been a month ago.”
Canada’s economy shrank by 13.4 per cent from 2019’s last three months to the end of March. The Organisation of Economic Cooperation and Development expects this year’s economic contraction to be 5.8 per cent, followed by a 4 per cent expansion in 2021.
“We’re generally stronger than most of the other major economies, but there are some major countries that we can point to that are arguably in stronger shape, like Germany, like Australia,” Porter said. “I don’t think we can rest on our laurels.”
For a triple-A rated country, Canada does run relatively high debt and a current account deficit each year, the economist said.
The risks to the rating include a longer-than-expected impact of the COVID-19 pandemic, weaker growth and lack of fiscal policy discipline.
“The longer the duration of the shock, the greater the risk of prolonged high unemployment and low investment, both of which could weaken medium-term growth prospects,” DBRS said.
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“The resulting damage to the economy’s productive capacity could lead to more persistent pressures on balance sheets across the economy, including government finances.”
The income support programs such as the Canada Employment Response Benefit and the Canada Emergency Wage Subsidy are expected to contribute about $228 billion to the deficit. The debt rating company “views the overall fiscal response positively, as the stimulus has been timely in delivery, temporary in design, and sufficient in size given the scale of the shock.”
While the International Monetary Fund has forecast Canada’s federal, provincial and municipal debt to expand from 89 per cent of GDP last year to 109 per cent of GDP in 2020, DBRS remains confident in the government’s ability to handle the burden because its stimulus measures are temporary, were issued from a standpoint for fiscal strength and incur low borrowing costs. The 10-year government bond yield averaged just 0.6 per cent over the last six months, it said.
High household indebtedness remains a vulnerability and could impede growth, but lower interest rates and income support programs should help for now, DBRS said. Also, the housing market has surpassed pre-pandemic highs.
“The sharp rebound in demand at least partly reflects pent-up demand following the shutdown in April and early May,” the debt rater said. “The outlook for the housing market will balance the dampening demand effects of a soft labour market and reduced immigration, with the supportive impulse coming from low mortgage rates and ongoing supply constraints.”
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