Canada still has some room to maneuver as it faces the prospect of a further economic slowdown in the year ahead, says Fitch Ratings.
The rating agency notes that, while the Canadian economy grew strongly in 2010 on the back of rising commodity prices and fiscal stimulus, growth trends have weakened this year. Private sector employment has shrunk for two consecutive months, it says, and Fitch now expects GDP to grow by 2.1% in 2011 (down from an earlier forecast of 2.9%).
Nevertheless, it says that the Canadian government’s “demonstrated ability to put forth a credible long-term fiscal consolidation plan provides critical support for the country’s ‘AAA’ rating. The government’s commitment to eliminate the federal budget deficit by the middle of this decade even in the context of weaker growth puts Canada ahead of other peers rated ‘AAA’.”
Additionally, with Tuesday’s decision by the Bank of Canada to leave interest rates unchanged, Fitch says this preserves limited monetary policy headroom “as the Canadian labor market shows increasing signs of weakness and the risk of external economic shocks emanating from the euro zone persists.”
“The macro prudential policies in place, a strong banking system, and the haven status of the Canadian dollar are likely to provide shock-absorbing support for the rating in a scenario where the euro zone crisis worsens and undermines global growth prospects further,” Fitch concludes.