MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month: CPC 70%
Five‑Year: CPC 55%

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
   
Turmoil
Financial Transfer Direct Investment Export
Market
18‑Month: Low A+ A A+
Five‑Year: Low A+ A (A+) A+
( ) Indicates change in rating.   *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
 

Years

Real GDP Growth %  

Inflation %

Current

Account ($bn)

2007-2011(AVG) 1.1 1.9 -25.33
2012(F) 1.8 1.9 -60.10
2013-2017(F) 2.2 2.3 -36.60

Risk of Overreach

Prime Minister Stephen Harper initially used the parliamentary majority attained by the CPC at the May 2011 general election to secure approval of corporate tax cuts, tough anti-crime legislation, and abolition of the national gun registry, all moves that pleased his party’s base without providing the weakened opposition with an easily exploitable issue.

However, more recent initiatives, such as a move to eliminate the monopoly control of the Canadian Wheat Board and the administration’s take-it-or-leave-it approach to hammering out a new formula for federal transfers to the provincial governments, have prompted accusations that Harper is treating his legislative rubber-stamp as a license to ignore the legal limits on his government’s authority.

Recent polls indicate that the CPC continues to enjoy a large lead over all challengers, suggesting that the public is not having serious misgivings about either the government’s agenda or its method of governing. But that could change in the coming year, as Harper’s administration is planning to move ahead with reforms of the old-age pension system and is playing hardball with the provinces on the issue of federal transfers to pay for the provision of public health services, both of which are politically sensitive topics.

The next general election is scheduled to take place on October 19, 2015 (although the prime minister can call an election before that date). As such, barring an unlikely schism within the CPC, Harper will have nearly four years to implement his party’s program, and his chances of success will probably be better if he proceeds at a measured pace, rather than trying to get everything out of the way quickly. In that regard, Harper’s experience governing without a majority, which if nothing else has taught him how to be patient, may serve him well.

Business-friendly Policies, despite Economic Challenges

Canada is among the top-ranked countries in terms of economic freedom, and no government formed during the five-year forecast period will be inclined to pursue policies that undermine that status. Nevertheless, the recent scuttling of major investment deals on “national interest” grounds points to the need for clarification of policy in this area, and the government will face heavy pressure to more closely regulate extractive industries.

The budget woes of the provinces may create new opportunities for investors, as provincial administrations look to the sale of state-run entities as a means of raising the cash to close their fiscal deficits. Success on the privatization front in Ontario, which is preparing moves in that direction, would almost certainly encourage similar action in other provinces.

The government will shortly unveil the budget for 2012/2013, and all indications are that Finance Minister Jim Flaherty plans to initiate an aggressive fiscal-consolidation program aimed at producing a balanced budget by the 2014/2015 fiscal year. Flaherty maintains that the positive effects of a continued economic recovery in the US, Canada’s main trade partner, will offset the growth-stunting potential of fiscal tightening. However, given the very real danger that a mishandling of the euro-zone debt crisis could trigger a global downturn, Flaherty’s confidence in the sustainability of the US recovery could prove to be misplaced.

An ongoing debate over whether the economy is threatened by a housing bubble adds another element of uncertainty to the domestic economic outlook. Low interest rates have fueled strong demand for housing, and the resulting steep increase in both home prices and household indebtedness creates the risk of a crash as interest rate are raised. With inflation risks receding, monetary authorities will face little pressure to hike rates in the near term, and the central bank expects slowing economic growth to promote the stabilization of prices in the housing market, creating the basis for a soft landing. Nevertheless, the threats to global economic stability make it impossible to rule out a less favorable scenario that could undermine support for Harper’s administration.

Economic Forecasts for the Three Alternative Regimes

  CPC NDP-Liberals Minority CPC
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2012 1.8 1.9 -60.10 -0.5 1.4 -55.40 1.1 1.8 -63.10
2013-2017 2.2 2.3 -36.60 1.6 2.6 -47.90 2.0 2.4 -45.70

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