The outlook for credit conditions in North America is stable, amid steady economic growth and government debt, says Fitch Ratings in a new report.
The credit rating agency expects economic growth in North America to improve in 2016, the Fitch report says. The U.S. economy will grow at 2.5% in 2016, the report says, and Canadian growth will improve to 2% in 2016 from 1% in 2015.
“Growth in both the U.S. and Canada will remain dependent on consumption, but household balance sheets appear more stretched in Canada, where overvalued housing markets and high household debt pose risks in the case of an economic downturn,” the Fitch report says, adding that a downturn in Canada is not its base case.
On the monetary policy front, Fitch expects the U.S. Federal Reserve to begin raising interest rates this month, and to hike rates at a gradual pace, without leading to a sharp slowdown in credit growth or economic activity. Conversely, the Bank of Canada is likely to keep its rates on hold, or even to cut rates, as the economy adjusts to the energy price shock, the Fitch report says.
The sovereign credit ratings for both the U.S. and Canada are ‘AAA’, Fitch says; and, it notes that both countries share one credit weakness, a relatively high gross government debt burden. “Debt dynamics are slightly positive in Canada and point to a gradual, medium-term deterioration in the U.S. without offsetting action,” it says.
In terms of gross general government debt, Canada is the second most indebted ‘AAA’ sovereign, the Fitch report says, and it expects that metric to trend down from 88% of GDP in 2015, with the general government running modest deficits. “The newly-elected Liberal government will run a looser fiscal policy at the federal level, yet the starting point is relatively strong, with a deficit of 0.3% of GDP expected this fiscal year, and we do not expect a dramatic short-term impact on public finances,” the Fitch report says.
The credit rating expects the Canadian banking sector to face its share of obstacles in 2016, including the overvalued housing market, declining energy prices, and low interest rates, according to another Fitch report. “Canadian banks are challenged by the record level of consumer indebtedness, unemployment concerns from depressed energy prices, and the risk of overvaluation in the housing market, which has so far been kept in check by steady employment levels and low interest rates,” says Doriana Gamboa, senior director at Fitch, in a statement.
Fitch views the housing market in Canada “as unsustainable and a looming price correction will pose a risk to banks, particularly if unemployment increases due to low energy prices,” the Fitch report says. However, the report maintains that these risks are manageable, since the banks’ underwriting models and the prevalence of mortgage insurance will soften the impact of a home price correction. And, the rating outlook for the sector is stable, the Fitch report says, due to its sound profitability, solid balance sheets, and supportive regulatory policy.
However, potential risks for the banking sector could rise “as the banks expand geographically and into wealth management and capital markets businesses,” the Fitch report says.