Country Report Canada October 2009

Outlook for 2010-11

• The Liberals will wait until the next budget, which is due in early 2010, before triggering a general election. The outcome is uncertain but is more likely to deliver a minority Liberal rather than a Conservative administration.
• General government finances will turn to deficits in 2010 and 2011, of 4% and 3.6% of GDP respectively, as expenditure, in particular for unemployment insurance, rises and falling corporate income tax returns bring down revenue.
• The central bank's main policy rate will remain fixed at 0.25% in 2009 as inflation hovers at around 0%. In the second half of 2010, rates will rise by 100 basis points.
• Real GDP is forecast to grow by 1.9% in 2010 (previously 1.2%) on the back of higher commodity prices, fiscal stimulus and a reprise in stockbuilding. GDP growth will ease to 1.4% in 2011 as trade prospects weaken.
• We forecast an average exchange rate of C$1.07:US$1 in 2010, reflecting the improved outlook for oil and commodity prices. The loonie will depreciate in 2011 as weaker global demand has a negative effect on commodity prices.

Monthly review

• The likelihood of an election later this year has receded after the left-leaning New Democratic Party (NDP) decided to support the minority Conservative government.
• The failure of the Liberals to topple the government has constituted a political defeat for its leader, Michael Ignatieff, but it may prove to be beneficial to the party in the medium term.
• As the opposition parties have failed to produce a coherent platform, the Conservatives are likely to gain support among voters.
• A combination of lower tax revenue, aggressive fiscal stimulus and support for the automotive industry has taken a toll on federal government finances.
• Custom tariffs on imports have been scrapped to help businesses' competitiveness. Canada has begun to retaliate against US protectionist policies.
• Recent economic data releases have suggested that a recovery may be more gradual and more shallow than previously expected.
• The unemployment rate has edged down for the first time in 12 months, owing to gains in the construction and manufacturing sector.
• Weak US demand for key Canadian exports, and a strengthening domestic currency, continued to hamper Canada's trade performance in August.

Source: Country Report