Economy, Finance and Trade:

Canada
Euromonitor International
August 2019
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LIST OF CONTENTS AND TABLES

Headlines ..................................................................................................................................... 1
Prospects ..................................................................................................................................... 1
Chart 1 SWOT Analysis: Canada.............................................................................. 1
Economic Landscape ................................................................................................................... 2
Economic Growth Slowing ........................................................................................................ 2
Chart 2 Economic Landscape of Canada ................................................................. 2
Country Risk analysis ................................................................................................................... 4
A Global Downturn Is the Biggest Risk for Canada .................................................................. 4
Summary 1 Country Risk Index (CRI) and Regional Context in 2019: Canada ............... 4
Chart 3 Top 2 Biggest Global Risks vs. Major Downturn: Canada ............................ 5
Monetary Indicators ...................................................................................................................... 5
Interest Rate Has Risen............................................................................................................ 5
Chart 4 Monetary Indicators in Canada .................................................................... 6
Imports ......................................................................................................................................... 6
Key Trade Agreement Could Help Exporters ............................................................................ 6
Chart 5 Import Profile of Canada .............................................................................. 7
Exports ......................................................................................................................................... 7
Current Account Deficit Narrowed ............................................................................................ 7
Chart 6 Policy Spotlight on Exports: Canada ............................................................ 8
Chart 7 Export Profile of Canada .............................................................................. 8
Investments .................................................................................................................................. 9
Significant Spending Planned for Infrastructure ........................................................................ 9
Chart 8 Policy Spotlight on Investments: Canada ................................................... 10
Chart 9 Investment Profile of Canada ..................................................................... 10
Government Finance .................................................................................................................. 11
Population Is Ageing Rapidly .................................................................................................. 11
Chart 10 Government Finances in Canada ............................................................... 11

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ECONOMY, FINANCE AND TRADE:

CANADA
Given its vast natural resources and status as a net energy exporter, Canada’s economy can
be at the mercy of global commodity price changes, particularly the oil price. However, its export
base is relatively well diversified and the economy continues to attract foreign investment, owing
to its solid business environment and skilled workforce. Nevertheless, a rapidly ageing
population could lead to a shrinking workforce, also worsening its fiscal health going forward.

HEADLINES
▪ Canadian annual real GDP growth decreased to 1.9% in 2018 from 3.0% in 2017
▪ Financial Intermediation, Real Estate, Renting and Business Activities was the largest sector
in the economy in 2018 accounting for 26.5% of GVA
▪ Canadian inflation increased to 2.3% in 2018 from 1.6% in 2017
▪ Canadian exports grew by 7.1% in 2018 in nominal terms, compared to an increase of 6.3%
for imports
▪ Public debt stood at 90.6% of GDP in 2018, compared to 117% for the G7 average
▪ Real average annual GDP growth of 1.6% is expected in the forecast period of 2019-2024

PROSPECTS
Chart 1 SWOT Analysis: Canada

Source: Euromonitor International

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ECONOMIC LANDSCAPE

Economic Growth Slowing

Canada’s GDP per capita in PPP terms was the third highest amongst the G7 group of
countries in 2018:
▪ Annual real GDP growth decelerated in 2018 over 2017, owing to subdued consumer
expenditure and housing construction. Furthermore, a low oil price negatively impacted
exports and corporate investment;
▪ As one of the most advanced economies globally that is in the tertiary stage of economic
development, ‘Financial Intermediation’ is Canada’s largest sector in gross value added
(GVA) terms;
▪ Owing to its highly lucrative natural resources sector, ‘Mining and Quarrying’ is by far the
greatest contributor to overall productivity;
▪ In the short term, the Canadian economy is expected to decelerate further, owing to the
uncertain global economic outlook. Once energy sector activity recovers, exports are
anticipated to rise, driven by solid demand from the USA. However, Canada faces multiple
challenges in the guise of depressed productivity progression, an ageing population, and a
lacklustre competitive potential. Domestically, falling house prices could lead to lower
consumer expenditure. A major risk is any obstruction in the passage of the United States
Mexico Canada Agreement (USMCA) that is replacing the North American Free Trade
Agreement (NAFTA). Average annual real GDP growth is forecast at 1.6% over 2019-2024.

Chart 2 Economic Landscape of Canada

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Source: Euromonitor International from ILO/national statistics/OECD/UN/IMF (WEO)

Notes: GVA by sector:
(1) Wholesale & Retail Trade includes Repair of Motor Vehicles, Motorcycles and Personal and Household Goods.
(2) Financial Intermediation includes Real Estate, Renting and Business Activities.
(3) Public Administration includes Defence and Compulsory Social Security.
(4) Education, Health & Social Work includes Other Community, Social & Personal Service Activities.
Productivity by Sector:
(a) Wholesale and Retail Trade includes Repair of Motor Vehicles, Personal and Household Goods (b) Community
includes Social and Personal Service Activities, Other
(5) Data for 2019 onwards is forecast

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COUNTRY RISK ANALYSIS

A Global Downturn Is the Biggest Risk for Canada

Summary 1 Country Risk Index (CRI) and Regional Context in 2019: Canada
Country Rank Development Country Risk Share of Top Country
Score Country Risks
Specific Risk

Canada 4 Developed 3.5 47.9% Global

Downturn,
Global Trade
War

USA 5 Developed 4.0 33.7% Global

Downturn,
Global Trade
War

France 6 Developed 4.0 29.1% Eurozone

Recession,
Global
Downturn

Germany 7 Developed 4.1 28.3% Eurozone

Recession,
Global
Downturn

Japan 14 Developed 4.5 32.6% Global

Downturn,
China Hard
Landing

United 24 Developed 5.4 24.4% Disorderly

Kingdom ND Brexit,
Global
Downturn

Italy 37 Developed 6.0 23.2% Global

Downturn,
Eurozone
Recession

Source: Euromonitor International

Note: Euromonitor’s Country Risk Index compares downside economic risks across 54 markets, representing
almost 90% of the global economy. For each country, the Country Risk Index provides an estimate of the
expected decline in economic activity, income levels or market sizes under adverse macroeconomic
conditions relative to the baseline outlook. The index incorporates 12 global downside economic
scenarios and two country-specific downside economic scenarios (representing country-specific shocks
to private sector sentiment, financial markets and geopolitical conditions). The Country Risk Index is
calculated as the probability-weighted average of all scenarios’ 3-year real GDP impacts in percentage
terms, conditional on the economy slowing down relative to the baseline (as captured by all the risk
scenarios). In theory, a minimum country risk score is 0 if a country is completely immune to economic
risks. The median (50th percentile) score is 5.6 and the average score is 5.9. The interquartile range
(25th to 75th percentiles) goes from 4.5 to 6.3.

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▪ A Global Downturn is the biggest risk to the Canadian economy in the forecast period, given
that the country is highly reliant on commodity prices that are sensitive to global demand.
Furthermore, this scenario is also exposed to a greater protectionist stance taken by
Canada’s key trading partner, the USA. Unemployment rates could rise substantially under a
Global Downturn, which could place pressure on consumer expenditure;
▪ The Country Risk Index (CRI) estimates that, on average, downside scenarios would reduce
output and income levels by around 4.0% relative to the baseline forecast over three years, if
they were to materialise;
▪ Canada has a low macroeconomic risk, according to the CRI, which is lower than its largest
trading partner, the USA. This is due to a more stable business landscape. Having said that,
country specific risks, such as household indebtedness brought on by a low interest rate
environment and a possible house price correction, are present within Canada’s risk profile.
Furthermore, an escalation in trade tensions with the USA also adds to Canada’s risk score.

Chart 3 Top 2 Biggest Global Risks vs. Major Downturn: Canada

Source: Euromonitor International Macro Model

MONETARY INDICATORS

Interest Rate Has Risen

Bank of Canada (BC) has signalled that its current monetary policy stance is appropriate, but
it is playing close attention to global risks, which indicates that rates could be lowered:
▪ Increasing energy prices caused annual inflation to rise in 2018;
▪ Between July and October 2018, BC raised the benchmark interest rate by 0.5 percentage
point to 1.75% at which level it currently stands. As a result of a higher benchmark interest
rate, both the long-term and overnight interbank rates rose over 2017-2018. However,

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relatively low interest rates have enabled money supply growth, providing liquidity for the
economy;
▪ The Canadian dollar is a free-floating currency, governed by market forces. Over 2013-2018,
the Canadian dollar depreciated by 25.8% against the US dollar, owing to oil price weakness
that is one of Canada’s major commodities;
▪ Over the medium term, the Canadian dollar may become more attractive than its US
counterpart, owing to greater economic and political volatility within Canada’s major trading
partner. Inflation is anticipated to reach 2.0% by 2024, in line with the central bank’s target.

Chart 4 Monetary Indicators in Canada

Source: Euromonitor International from national statistics/OECD/UN/IMF

Note: Data for 2019 onwards is forecast

IMPORTS

Key Trade Agreement Could Help Exporters

Total goods imports rose by 6.3% year-on-year in USD terms in 2018, owing to stable
domestic demand:
▪ ‘Machinery and Electrical’ is Canada’s biggest import category, owing to inputs needed to
feed its industrial sectors;

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▪ Given that over half of total goods imports originated from the USA in 2018, Canada is highly
reliant on its large neighbour for goods and is heavily exposed to supply disruptions in the
USA;
▪ In December 2018, Canada enforced the Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP) with 10 other countries, which is anticipated to boost trade
significantly with fellow signatories. It is also in the initial stages of negotiating free trade
agreements (FTAs) with ASEAN (Association of Southeast Asian Nations) and China.

Chart 5 Import Profile of Canada

Source: Euromonitor International from IMF, Direction of Trade Statistics

EXPORTS

Current Account Deficit Narrowed

In 2018, total goods exports rose by 7.1% year-on-year in USD terms, owing to strong energy
exports:

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▪ ‘Mineral Products’ is Canada’s largest export category, given its vast natural resources. This
also makes the country a net energy exporter, with a ‘Mineral Products’ export bill of USD92.3
billion in 2018. However, the country is highly susceptible to global energy price shocks.
Nevertheless, its export base is relatively well diversified;
▪ Given that around three quarters of total goods exports were destined for the USA in 2018,
Canada is extremely vulnerable to demand shocks arising from its giant neighbour, which
could severely destabilise Canada’s external sector;
▪ Canada’s current account deficit narrowed markedly over 2015-2018, on the back of
recovering global oil prices (following their significant correction at the end of 2014). The trade
deficit narrowed in 2018 over 2017, owing to greater exports growth than imports progression.

Chart 6 Policy Spotlight on Exports: Canada

Source: Euromonitor International

Chart 7 Export Profile of Canada

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Source: Euromonitor International from national statistics/OECD/IMF/IFS/WEO/Direction of Trade Statistics

Note: Data for 2019 onwards is forecast

INVESTMENTS

Significant Spending Planned for Infrastructure

Canada’s foreign direct investment (FDI) inflows recovered sharply in 2018, as investors
exhibited increasing confidence in the direction of the Canadian economy, despite oil price
volatility:
▪ Consequently, FDI intensity also rose to 2.3% of GDP in 2018, highlighting that it is an
important economic driver;
▪ Gross fixed capital formation was little changed in 2018, pointing to muted infrastructure
spending by the state. Having said that, the Canadian government has outlined an ambitious

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infrastructure spending plan through the Invest in Canada programme, which aims to spend
CAD180 billion between 2016 and 2028;
▪ A favourable business environment and highly skilled labour force are attractive to foreign
investors. However, population ageing and relatively high household indebtedness are
deterrents.

Chart 8 Policy Spotlight on Investments: Canada

Source: Euromonitor International

Chart 9 Investment Profile of Canada

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Source: Euromonitor International from national statistics/OECD/UN/IMF/IFS

Note: Data for 2019 onwards is forecast

GOVERNMENT FINANCE

Population Is Ageing Rapidly

Higher tax revenues caused the general government net budget deficit to narrow considerably
over 2013-2018 to finish the period at 0.4% of GDP. However, there were large differences
amongst provincial budget balances, with some improving owing to rising oil revenues (Alberta)
and others deteriorating owing to lower tax revenues and greater spending (Ontario):
▪ Public debt stood at 90.6% of GDP in 2018 and is unsustainable;
▪ With those aged 65+ rising from 17.2% of the total population in 2018 to 23.1% in 2030,
Canada has an ageing population that is growing rapidly. Indeed, the old-age dependency
ratio will rise from 25.7% in 2018 to 37.4% in 2030, which is likely to place considerable
pressure on government finances in the form of pension and healthcare costs going forward.

Chart 10 Government Finances in Canada

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Source: Euromonitor International from national statistics/IMF/OECD

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