Canadian economic growth is expected to slow over the next couple of years, but the braking won’t be as hard as previously expected, according to a report published Wednesday by New York based Fitch Ratings.
In its latest Global Economic Outlook, Fitch increased its forecast for real gross domestic (GDP) growth in Canada next year to 1.9% from 1.6%. The rating agency also boosted its forecast for 2020 to 1.7% from 1.4%.
“Growth is decelerating, but the agreement to revise and replace NAFTA reduces uncertainty around trade, and consumption has proved relatively resilient. We have also slightly revised up our estimate of Canada’s long-run growth potential,” Fitch says in the report.
The somewhat brighter economic outlook, coupled with modest government deficits, has Fitch expecting that Canada’s gross general government debt (GGGD) ratio will continue to decline over the next couple of years. The stronger economic backdrop means that tax cuts and other measures announced in the federal government’s latest Fall Economic Statement (FES) will produce only slightly wider federal deficits, compared with previous forecasts.
“Moreover, the lowering of marginal tax rates on business investment in the FES (at an estimated cost of 0.2% of GDP in tax revenue in 2019 and up to 0.6% over five years) should help preserve competitiveness relative to the US and support investment in the near term,” the report says.
The federal government’s approach to fiscal policy “reduces the public finances’ resilience to a sharper economic slowdown or sudden shock. This is not our base case, but there are downside risks to investment and growth, including the possibility of a sustained fall in energy prices, which would be magnified by Canada’s oil transport constraints,” the report adds.
The report sees global growth slowing and becoming less well-balanced, with downside risks rising, particularly for 2020. However, Fitch’s global growth forecast remain unchanged for this year and next, with global growth expected to come in at 3.1% in 2019, before falling below 3% in 2020.
“The world economy is still expanding at a rapid pace, but cracks are starting to appear in the global growth picture,” says Brian Coulton, chief economist at Fitch, in a statement. “Eurozone growth outturns have disappointed once again, world trade is decelerating and the China slowdown is now fact, not forecast.”
The rating agency’s base case remains a soft landing for global growth in 2020, but the report cautions that downside risks to that view are rising, including the risk of a faster-than-expected tightening of global financial conditions, escalating market fears about eurozone fragmentation, and continued concerns about trade protectionism.