New York-based Fitch Ratings Inc. has affirmed Canada’s sovereign credit rating at AAA, with a stable outlook, citing the country’s economic, political and institutional strengths.
Although weakness in oil prices has likely placed the overall economy in a mild recession, a couple of interest rate cuts and the resulting decline in the Canadian dollar should help exports, the credit-rating agency says. As a result, Fitch expects a recovery in the Canadian economy in the second half of 2015, taking overall real gross domestic product growth to 1% in 2015. Fitch expects growth of more than 2% in 2016, supported by growth in the U.S.
In terms of downside risks to the outlook, Fitch cites high levels of household debt and areas of real estate overvaluation. The firm continues to say that residential property prices are 20% overvalued, relative to fundamentals, but it also expects “the Canadian housing market will achieve a soft landing and that the government will remain proactive and pragmatic in its approach to address macroeconomic and banking sector vulnerabilities.”
Indeed, “without a broad-based shock to employment or a sharp rise in interest rates, the risks are manageable,” Fitch says.
As for oil prices, Fitch assumes that Brent crude will average US$65 a barrel in 2015, US$75 a barrel in 2016 and US$80 a barrel in 2017. However, the risks to these assumptions are largely on the downside, it notes.
“Falling oil prices and a shock to gross domestic income may prevent the federal government from achieving its cherished goal of a fiscal surplus in [fiscal] 2015-16, but without jeopardizing the downward trend,” Fitch concludes.