The Canadian economy and government finances are in decent shape heading into 2019, but the headwinds are gaining strength, says a report published Monday from New York-based Fitch Ratings.
The global economic outlook is still relatively strong, according to the report, with global gross domestic product (GDP) growth expected to come in at 3.4% in 2018, slowing to 3.1% in 2019.
However, there are downside risks facing the outlook, the report says, such as ongoing global trade tensions and the challenging policy environment.
“The global economy is still in a relatively robust place, but we’re well aware of the headwinds emerging in 2019,” says Katherine Weber, head of country risk for the Americas at Fitch Solutions, in a statement.
Against this backdrop, Canada’s AAA credit rating continues to have a “stable” outlook, the report says. Canada’s general government deficit sits at around 1% of GDP and this is “low enough to keep the debt/GDP ratio on a downward path.” Additionally, Canada’s potential growth rate “compares relatively well with other large developed economies.”
Government debt issues are more challenging at the provincial level. “Recent electoral shifts among some Canadian provinces have moved the overall needle toward a more conservative approach to taxation, programs and fiscal balance,” says Marcy Block, senior director at Fitch, in a statement.
As a result, Fitch expects net debt to GDP burdens in Alberta and Ontario to rise, British Columbia and Quebec to maintain fiscal balance and Saskatchewan to move toward fiscal balance.
Despite a recent cooling in the housing market, Canadian consumers “remain susceptible to rising interest rates”, the report says. “Canadian variable rate mortgages have become more expensive and fixed rate borrowers will see increases to their rates as they renew,” says Michael Buzanis, senior director at Fitch, in a statement. “Extending amortization or tapping equity from home price appreciation provides flexibility to absorb higher rates.”
Additionally, personal bankruptcies, credit card chargeoffs, and delinquencies “all remain low, the report says, and “credit card monthly payment rates in Canada are among the highest in the world, indicating a continued strong willingness and ability to repay debt.”
For investors in Canadian bank debt, the implementation of the new bank bail-in regime is a top issue. So far, Fitch hasn’t revised credit ratings, but as banks issue more bail-in eligible debt, ratings changes may occur.
“Fitch may upgrade by one notch obligations that are excluded from bail-in such as deposits, derivative obligations and legacy debt when sufficient debt buffers are built up,” says Christopher Wolfe, managing director at Fitch, in a statement.
“In short, Canada has by and large done a commendable job of heading off broader market risks thus far, though these efforts will be put to a tougher test in 2019,” the Fitch report concludes.