As it prepares an update on its finances next week, Canada has received praise from some lofty channels.
“Across the Group of Seven, Canada’s probably in the strongest position fiscally,” Nigel Chalk, director of the
International Monetary Fund’s
Western Hemisphere Department, said last week in an
Bloomberg interview in Washington.
What does Canada have going for it? For one, the nation continues to maintain one of the highest credit ratings among its advanced economy peers, said Desjardins Group economists Randall Bartlett and LJ Valencia.
Ballooning debt since the pandemic has made investors increasingly nervous about government bonds, but among advanced nations Canada is seen as one of the “cleanest fiscal dirty shirts,” they said.
The IMF recently predicted that Canada’s general government
deficit and gross debt
would likely fall near the bottom of the G7.
But the area where Canada really shines is government net debt which subtracts financial assets from gross debt. That equation makes our debt the lowest in the group of nations.
What gives our country an edge is a well-managed social security system — the
Canada and Quebec Pension Plans
— which is a big contributor to a “globally impressive financial asset base,” said economists with the National Bank of Canada.
Over the past five years, over $1 trillion in market value has been added to that government asset base, making it second only to Norway’s as a share of
gross domestic product.
On April 28, Finance Minister Francois-Philippe Champagne will present the spring economic statement, one year after Mark Carney’s Liberal government came to power.
It has been 12 months of economic turmoil, as the country was rattled first by Donald’s Trump trade war and now by a global energy crisis sparked by the
U.S., Israeli war on Iran.
Last November the
federal budget
estimated that spending on defence and infrastructure would push net debt-to-GDP ratio to 43 per cent, Bloomberg reports.
That still leaves Canada in a stronger financial position than other G7 countries, many of which carry net debt levels near or above 100 per cent of GDP.
Events have also worked in Ottawa’s favour since the November budget, said Desjardins.
Upward revisions to GDP and stronger economic growth this year make deficits and debt a smaller share of the economy, the measures rating agencies look at.
Canada’s reputation as the “cleanest dirty shirt” is reinforced by solid investor demand for government debt, said Bartlett and Valencia, but this isn’t something Ottawa should take for granted.
“While the federal fiscal forecast could be worse, the risks to the Government of Canada’s deficit and debt projections are largely to the downside,” said the economists.
The outcome for review of the
Canada United States Mexico Agreement
set for July 1 remains highly uncertain, with Desjardins expecting that the tariff regime probably won’t get much better and could get worse.
Bond yields are also climbing as the Iran war fuels inflation expectations and higher interest rates would further erode federal fortunes, they said.
“Keeping some fiscal powder dry for any future need would be wise.”
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It could have been worse.
That’s the reaction of many to Canada’s inflation numbers out Monday. A shock was expected, considering where the Iran war has been taking gas prices lately. Inflation did jump more than half a percentage point to 2.4 per cent in March, but fell short of the 2.6 per cent hike economists had been expecting. That’s despite gas prices surging 21 per cent in the month, the biggest increase on record.
Core measures important to the
Bank of Canada
, which decides on rates next week, were subdued, with one holding steady and the other easing slightly.
“Our considered view is that if it were not for the conflict with Iran, the discussion would currently be revolving around the strong possibility of BoC rate cuts, not hikes,” said Douglas Porter, chief economist at BMO Capital Markets.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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