TORONTO: Canada’s outperformance versus many advanced economies is creating staying power and increasing our popularity with foreign investors, according to a new report from CIBC World Markets Inc.
Canada’s fiscal advantages include:
- Years of fiscal outperformance and surpluses in Canada have created budgetary room to slash corporate taxes and implement tax reforms
- Canada is a growth leader, with the IMF the latest forecaster to see us leading the G7 in terms of average real GDP growth
- A well-capitalized banking sector will need less dramatic adjustment to regulation
- Canadian exporters have limited direct exposure to slow-growing Europe and at the same time have had success in increasing exports to the faster-growing BRIC region
- Healthy international and interprovincial migration support a faster potential economic growth rate
“Canada is increasingly on the lips and minds of international investors,” says Warren Lovely, government strategist with CIBC’s Macro Strategy group. “Those we’ve talked to are getting religion on Canada’s potential outperformance versus a growing list of advanced economies. Indeed, it’s hard to recall a time when the country possessed such relative, if not absolute, strength.”
In CIBC’s latest Global Positioning Strategy report, Mr. Lovely identifies a list of “strategic advantages” that are boosting interest in Canada and its weighting in global investment portfolios.
Canada’s fiscal advantage begins with a much smaller need for fiscal adjustments to stabilize debt ratios. Our provinces are not feeling the same heat as some U.S. states and are less prone to severe program cuts or increased revenue measures, which means less risk for regional economies.
In addition, the revenue picture for Canada’s federal and provincial governments is also good, with $15 billion in extra revenue projected for the year.
Lovely says this fiscal improvement will reduce borrowing requirements and protect federal and provincial credit ratings. Less bond issuance from Ottawa which will “leave plenty of room in the long end for provincial and corporate issuers.”
Other distinguishing advantages for Canada noted in the report include the following:
But there are challenges to Canada’s continuing outperformance. He notes that three quarters of Canada’s exports go south of the border, meaning a lingering U.S. slowdown will leave its mark.
“Canadian and U.S. real GDP growth has never been more tightly correlated than during the past five years. So the end of an American inventory rebuilding process will sap demand for Canadian wares,” adds Mr. Lovely.
Other risks to Canada’s economic prospects include the impact of a continuing strong Canadian dollar on manufacturing, an overheated housing market and highly indebted household sector.
“Notwithstanding these challenges, Canadian governments are courting international investors from a position of strength, hardly beholden to foreign capital, but happy to take full advantage of a healthy appetite for Canadian fixed income product,” says Mr. Lovely. “The message is getting through, and there’s every reason to believe that today’s strong foreign investor interest in Canada will have staying power.”