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The ruling came before the Liberals released an update to the outlook in early July for federal spending, which projected a deficit of $ 343.2 billion and debt of over $ 1.2 trillion.
These numbers were before the Liberals last week pledged to spend $ 37 billion to revamp income support programs for hard-hit workers.
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Fitch said in a note that gross government debt will account for 120 percent of economic output, which is “significantly higher” than the median of a double-A rating.
The rating agency said it expects a sharp decline in government spending from 2021, but the current growing deficit will make it more difficult to contain spending and debt over the medium term.
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But he’s also sending a signal about the political dynamic on Parliament Hill, with an imminent Speech from the Throne that will feature a stimulus package that will require the Liberals to garner the support of enough opposition MPs to win a vote. vote of confidence, or plunge the party. in a federal campaign.
Fitch says he’s uncertain whether the Liberals and Prime Minister Justin Trudeau can win a majority in a federal election. Newly-elected Conservative leader Erin O’Toole “presents a new dynamic,” the agency wrote, noting that its leadership platform included a promise to balance the budget.
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“Regardless of which party is in power after 2020, the government faces serious fiscal and economic policy challenges and risks,” Fitch’s memo said.
The government has had to dramatically increase spending since March when the pandemic hit Canada, forcing the closure of businesses and workers ordered to stay at home to slow the spread of COVID-19.
These restrictions have since been lifted and economic output increased in May as a result.
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Statistics Canada will release gross domestic product readings for June and the second quarter of 2020 on Friday. Economists’ average estimate is for a nearly 40 percent drop in GDP for the second quarter compared to the same three-quarter period. months in 2019, according to financial data firm Refinitiv.
Fitch expects the economy to remain sluggish and unemployment to remain high for the remainder of the year, just as the federal government projected in its July Economic Outlook.
Since then, some of the main political players have changed. Bill Morneau resigned as finance minister and was replaced by Chrystia Freeland, “who quickly announced the new spending measures,” Fitch wrote.
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The Liberals are proposing three new benefits for workers costing $ 22 billion, to help those who are not eligible for employment insurance and to facilitate access to employment insurance at a cost of $ 7 billion.
The Canadian Emergency Response Benefit, previously budgeted at around $ 80 billion, will be extended by four weeks at a cost of $ 8 billion. The latest federal figures show CERB spending topped $ 70 billion as of the middle of this month.
New spending measures are expected this fall when the government updates spending plans. The Liberals have yet to come up with a budget for the year.
“We expect spending pressures to remain pronounced as unemployment remains high and economic activity is subdued, and Canada’s decentralized fiscal framework, particularly its large intergovernmental transfers, will increase the complexity of any fiscal adjustments,” wrote the rating agency.
“Failure to put consolidated gross government debt / GDP on a downward path over the medium term could lead to negative rating action.”
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