OTTAWA – Canada is maintaining its triple-A credit rating thanks to a steady economic outlook, but the country also faces potential risks amid mounting household debt and climbing house prices, Moody’s Investor Service said.
The U.S. credit rating agency said in a report Monday that Canada earned the top grade through its “relatively solid economic performance,” due to its sound banking system, relatively low government debt and a projection to balance the books following a series of deficits.
“After a recession at the time of the global financial crisis, the economy recovered and continues to show positive momentum, supporting improvement in government finance,” the Moody’s assessment said.
However, the research also zeroed in on possible economic threats.
The report said Canada suffers from high household debt and a “particularly inflated” housing market in some big-city areas. It warned how both continue to rise.
“This combination presents a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages,” said the report, co-authored by Steve Hess and Dmytro Kulakovskyi.
For years, both the Bank of Canada and the Finance Department have warned Canadians about amassing too much debt.
But both Bank of Canada governor Stephen Poloz and Finance Minister Joe Oliver have downplayed the susceptibility of the Canadian housing market, even though Poloz still views it as the top domestic threat to the economy. Oliver and most analysts have predicted a soft landing for the real-estate market.
Moody’s offered a gloomier take on the situation.
“With no signs of a soft landing for the housing market in sight, we believe that this increased vulnerability presents the largest downside risk to our medium-term forecast,” the report said.
In the summer, U.S. financial agencies Fitch Ratings and Morningstar issued separate warnings about the Canadian housing market, saying it was overpriced and at risk of a correction.
On Monday, the Moody’s report said Canada’s expected interest-rate hikes over the coming years will boost the cost of borrowing and apply pressure to housing prices.
A poll released Monday suggested a large chunk of indebted Canadians, particularly younger people, didn’t know how they would manage their finances if they were suddenly forced to stop working.
Thirty-nine per cent of Canadians had no idea how they would pay their expenses if they were struck by a sudden illness and couldn’t work for six months, an Ipsos Reid survey of 1,000 people commissioned by TD Insurance suggested.
That figure rose to 44 per cent for respondents under the age of 35.
The TD survey found those polled said they would need an average of $45,609 in savings to cover their expenses for a year, just under the average yearly income reported by Statistics Canada.
The Moody’s report said big debts in Canada reach beyond individuals.
It found the provinces carried large amounts of debt, but noted their credit profiles remained strong.
Over the long term, Moody’s warned that to keep its credit rating, Canada must maintain “fiscal discipline” when spending on social programs.
It also cautioned Canada’s “persistently weak” investment in manufacturing equipment and intellectual property threatens to eat away at the economy’s competitiveness and make it even more dependent on the resource sector.
Still, the document highlighted the “moderate reacceleration” of Canada’s economy.
It said the country’s real, year-over-year growth rate bounced back from just one per cent in 2010 to 2.5 per cent this year, listing exports and private consumption as contributors to the increase.
On Monday, Oliver mentioned the country’s high credit ratings as he spoke about what he called “the Canadian economic success story” in a speech at Canada’s Embassy in Beijing.
“The credit rating agencies accord Canada a top triple-A rating, with a stable outlook, one shared by a very few countries,” said the prepared remarks for a speech delivered by Oliver during his visit to China for a meeting of Asia-Pacific Economic Cooperation finance ministers.
“Canada stands out as an island of stability in an unstable world.”
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