Fitch Ratings Inc. has affirmed Canada’s “AAA” credit rating with a stable outlook on Wednesday despite concerns about slow economic growth, rising deficits and overheated housing markets.
“Slower [gross domestic product (GDP)] growth, the impact of lower oil prices on national income and a fiscal stimulus package have caused the fiscal outlook to deteriorate relative to our last review,” Fitch says.
However, Fitch expects the federal budget deficit will start to decline in 2017-18, assuming that the government’s infrastructure-spending boost is unwound as planned in the latest federal budget.
The overall general government deficit, including the provinces, will rise to 2.5% of GDP in fiscal 2016-17 from 1.3% in fiscal 2015-16, Fitch says, but it expects this to improve beyond 2017 “as the federal deficit peaks and the provinces make progress reducing their deficits.”
The credit-rating agency forecasts Canada’s real GDP to grow by 1.3% in 2016, rising to 2.1% in 2017, when the impact of higher government spending peaks. It also expects the Bank of Canada to “maintain an accommodative policy stance, even if the Federal Reserve raises rates.”
Household debt and inflated housing markets remain key risks, Fitch notes. However, the Canadian banking system is ranked on par with the strongest global peers, it says. And, while Fitch estimates that property prices are 20% overvalued nationally, it expects that the property market will avoid a “hard landing”.
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