Country Report Canada March 2009

Outlook for 2009-10

• Support for the main opposition Liberal Party will grow in line with doubts about the Conservative government's management of the economy.
• The worsening recession and arguments over fiscal policy are expected to lead to a government defeat in parliament in the second half of 2009. This will trigger another general election, which we expect the Liberals to win.
• New data suggest a dramatic worsening of the Canadian economic outlook, particularly for investment and trade, and we have downgraded our forecast for real GDP to a 2.2% contraction in 2009, and just 0.7% growth in 2010.
• Our lower forecast for economic activity, the expansionary January budget and arguments over its implementation lead us to expect even bigger general government deficits, of 2.8% and 4% of GDP in 2009 and 2010 respectively.
• After the March cut by the Bank of Canada (the central bank), we expect interest rates to be on hold until the second half of 2010, when economic recovery induces a full percentage point of rises by the end of the year.
• The weak exchange rate and even weaker external demand will push the trade balance into the red in 2009, and the current account into deficits of 2.4% and 1.4% of GDP in 2009 and 2010 respectively.

Monthly review

• Arguments have grown over implementation of the government's budget proposals. Its efforts to expedite C$3bn of infrastructure spending have met with concern over accountability and previous funding misappropriations.
• Barack Obama made Canada his first foreign destination as US president in a visit on February 19th. Discussions focused on trade and border issues.
• The Bank of Canada lowered it key overnight interest rate to 0.5% on March 3rd, and suggested that it would consider non-orthodox means of monetary expansion if the economy required it.
• All-item inflation was 1.1% in the year to January, after 1.2% in December. Core consumer price inflation rose by 1.9%, down from 2.4% in December.
• Real GDP fell by an annualised 3.4% in the last three months of 2008, according to the latest national accounts data. This was the sharpest quarterly contraction since 1991 and real GDP grew by just 0.5% in 2008 as a whole.
• Corporate profits fell by 20% in the fourth quarter of 2008, relative to the previous three months. This was the biggest fall since the early 1960s.
• The trade balance moved into deficit in December 2008 for the first time in nearly 33 years. Export revenue (seasonally adjusted) was down by 9.7% and import costs were 5.7% lower.