Country Report Canada February 2009

Outlook for 2009-10

• The recent political turmoil has weakened the Conservative government, and damaged its reputation for economic management. The worsening economic environment in 2009 will weaken support further.
• We expect an emboldened opposition to force another general election in the second half of 2009, which the Liberals will win.
• The combination of the new spending plans in the budget and the deteriorating economy will reduce revenue and increase countercyclical expenditure. This will produce a deficit of 2.4% of GDP in 2009 and 3.6% of GDP in 2010.
• We have revised down our expectations for Canadian real GDP in the outlook period, to a 1.6% fall in 2009 and just 0.9% growth in 2010. This has been driven by the worsening situation in the labour and housing markets.
• We expect a further 50-basis-point cut in the central bank’s main policy rate in the first half of this year, as inflation falls well below the 2% mid-point of its target range. Rates will then be kept on hold until mid-2010.
• The current account will post deficits in 2009 and 2010, amounting to 1.9% and 0.6% of GDP respectively, as feeble external demand and the weak exchange rate squeeze the trade balance.

Monthly review

• The incumbent Conservative government presented an updated budget proposal on January 27th. This included substantial fiscal stimulus to appease the coalition of opposition parties.
• The Liberals supported the budget and it was passed by parliament. However, the new Liberal leader, Michael Ignatieff, introduced an amendment requiring regular reports to parliament on implementation of spending plans.
• Barack Obama, the new US president, is due to visit Canada on February 19th. He will face increasing Canadian concern over protectionism, particularly over "Buy American" amendments to the US fiscal stimulus plans.
• The new budget forecasts a deficit of C$34bn in fiscal year 2009/10 (April-March) and C$30bn in 2010/11, and a return to surplus only by 2013/14.
• Real GDP fell by 0.7% in November 2008, the weakest performance for five years. This follows a 0.1% contraction in October.
• The rate of unemployment jumped to 7.2% in January this year, from 6.6% in December, and employment fell for the third successive month.
• The all-item consumer price index rose by only 1.2% in the year to December, having fallen by 0.7% during the month.