The ongoing uncertainty in the outlook for the global economy appears to be the catalyst for a slowdown in Canada according to Standard & Poor’s. However, the credit ratings firm says a prolonged retrenchment is unlikely.

S&P says that the monetary and fiscal policies in Canada remain highly expansionary and purchasing power of consumers also is being buttressed by strong employment growth. The economy is still on track for a ramp-up in growth in the second half of 2003, it notes.

Not all of the news is positive, however, and S&P says that for some of the problem areas in the economy, it is useful to look at recent trends in credit quality. It says that the erosion of Canadian corporate credit quality in 2001 and 2002, has been shallower than major trading partners (notably the U.S.). But the deterioration in some sectors was just as problematic. More than three-quarters of credit rating downgrades in Canada between 2001 and 2002 were concentrated in four sectors of the economy: telecommunications services, information technology, materials, and consumer discretionary.

It says that the erosion in techs and telecoms was quite significant, but the damage was not enough to drag the broader economy into recession. “Output declines were concentrated on the manufacturing side of the information technology sector, which represents a relatively small share–barely 1%, of total economy GDP.”

The materials sector accounted for 25.8% of all Canadian credit rating downgrades in 2001 and 2002. Primarily, this is a commodity-price story.

The consumer discretionary sector contributed 17.2% of all downgrades, and within this group media companies were the hardest hit, accounting for most of the deterioration in credit quality in the sector. A sluggish global economy that diminished advertising activity was the main problem in this area.

Looking ahead at some of the sectors still facing credit-quality erosion, S&P suggests that ratings in the financial, utilities, and materials sectors are still at risk. Within these three sectors, utility ratings are most at risk in the near term.

In the financial services sector, S&P has a negative outlook on the Canadian life insurance industry. Although the industry is considered to be among the most financially strong in the world, a number of challenges facing life insurers have led to the negative outlook. “These challenges include the continued pressure for insurers to increase their return on equity, negative credit market trends, pressure on wealth management businesses due to continued softness in the global equity markets, market overcapacity, and risk associated with industry consolidation,” it says.