Country Report Canada May 2009

Outlook for 2009-10

• The Conservatives' grip on power is loosening as the economy has slid into a sharp recession. We expect a challenge in parliament by the Liberals, the main opposition, in the second half of 2009, triggering another general election.
• The recession has worsened in the first quarter and we have revised down our forecast for growth. We now expect real GDP to fall by 2.9% in 2009, driven by falls in real private consumption and investment.
• Rising unemployment and falling corporate profits will force a general government deficit of 2.3% of GDP in 2009. Spending delayed between 2009 and 2010 and more job losses will increase the deficit to 3.8% of GDP in 2010.
• We expect headline consumer prices to rise by an average of just 0.2% in 2009. Stronger demand from monetary and fiscal stimulus will then push the average rate of inflation to 1.6% in 2010.
• We expect the Bank of Canada to hold its policy rate at 0.25% until mid-2010, consistent with our forecast for very weak inflation. It will, however, deploy more unorthodox monetary stimulus to ease spreads in money markets.
• Weak global demand will cause a trade deficit in 2009, and current-account deficits of 2.8% and 1.7% of GDP in 2009 and 2010 respectively.

Monthly review

• Tension is growing between the Conservative government and Brian Mulroney, a former Tory prime minister and the subject of an ongoing public inquiry. Mr Mulroney still has sizeable support in the Tory party and Quebec.
• The Liberals have taken a substantial lead in the latest EKOS poll over the incumbent Tories. The Tories have lost most ground in Ontario and Quebec, which carry more than one-half of the seats in the House of Commons
• The government is increasing efforts to improve relations with China. The trade minister, Stockwell Day, visited China for more than a week in mid-April and Stephen Harper is expected to pay his first official visit later this year.
• The Bank of Canada made a sharp downgrade to its forecast for 2009 in its April review and cut its policy rate to 0.25%. It committed to holding this level until mid-2010, barring a surge in inflation.
• Chrysler filed for bankruptcy protection in the US on April 30th. It will receive another C$3.8bn in loans from Ottawa and Ontario to help it restructure and to cement an alliance with Fiat, an Italian carmaker.
• The government launched talks in early May on a pioneering free-trade agreement with the EU, which is Canada's second-largest trading partner, despite a dispute over seal hunting.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37
NAICS Code: 336