Country Report Canada June 2009

Outlook for 2009-10

• The government's budget depends on Liberal support to proceed. We expect the Liberals to withdraw this support at the next budget progress report, due in December, triggering a vote of no confidence and another general election.
• We expect another election in December or early 2010 to deliver a minority Liberal administration, governing from a centrist policy platform.
• General government finances will turn to deficits in 2009 and 2010, of 2.1% and 3.7% of GDP respectively, as public finances are weighed down by falling corporate income tax returns and the rising cost of unemployment benefits.
• The central bank's main policy rate will remain on hold in 2009 at 0.25% as inflation hovers around 0%, and non-orthodox monetary loosening will be deployed. In the six months from mid-2010 rates will rise by 100 basis points.
• We now expect a real contraction of nearly 16% in exports in 2009. However, our outlook for private consumption has improved slightly and we maintain our real GDP forecast of a 2.9% contraction in 2009 and 0.7% growth in 2010.
• We now forecast an average 2009 exchange rate of C$1.16:US$1 (from C$1.20 in our last report), reflecting resurgent oil prices and Canada's current lack of non-orthodox monetary loosening, in contrast to other developed economies.

Monthly review

• The Liberals have threatened to bring down the government if the June budget progress report does not reveal enough progress on fiscal stimulus and if reforms to employment insurance are not adopted.
• In British Columbia, the Liberal Party has renewed its mandate in the provincial parliament, despite introducing a controversial carbon tax in 2008.
• The government has announced plans to sell Atomic Energy of Canada's nuclear reactor operations, pursuing its objective of reducing state ownership.
• The finance minister has revised the government's federal deficit forecast for 2009/10 from C$33.7bn (US$29bn) in January to C$50bn, owing to falling tax revenue, higher spending on unemployment and car industry bail-outs.
• New data for the first quarter of 2009 show that real GDP contracted at an annualised rate of 5.4%, its fastest rate of growth since 1991.
• The Bank of Canada governor has said that the Canadian dollar's appreciation could damage the recovery, but that quantitative easing or foreign-exchange intervention could be used to offset its disinflationary impact.
• Exporters' objections are growing to the "Buy American" provisions of the US stimulus package, and municipalities are threatening retaliation.