BMO Economics senior economist Robert Kavcic gives his view on how Canada shapes up against its neighbour
Whether it’s a consumer, a business, or the largest economy in the world, having your credit rating downgraded is more than just a kick in the teeth.
Access to borrowing – and how much it costs – are tangible results of a rating downgrade and having seen Fitch Ratings downgraded the United States’ long-term ratings from AAA to AA+ in the past week, should Canada be concerned?
Robert Kavcic, senior economist and director at BMO Economics has addressed the topic in an article on the banking group’s website.
Noting that the downgrade for the US was not that surprising given its deficits more than 8% of GDP at the top of the business cycle, he pointed out that Fitch had also expressed governance concerns and a growing debt burden among the factors that led to the weakened rating.
Kavcic also highlights that Canada was already downgraded to AA+ by Fitch during the pandemic peak in 2020, although retained its AAA rating by the other big-three ratings firms.
Not all rosy
While there are certainly concerns around the high levels of pandemic support, the government’s spending, and a rising tax burden, these are low when considered relative to the concerns about the US economy.
The state of the Canadian province’s finances is also not hugely concerning with budgets largely balanced and combined provincial net debt down to 30% of GDP.
Kavcic’s conclusion?
“We wouldn’t go so far as to say everything is rosy in Canada from a fiscal perspective, especially when the desire to spend and run deficits meets a sharply higher interest rate environment. But, on a relative basis, the U.S. is setting a pretty low comparison bar to step over,” he wrote.
