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2019 Country Focus – Canada

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With the first half of 2019 nearly behind us, we witnessed a lot of positive developments along with challenges that we expect to continue for the balance of the year. To summarize the economy is slowing and with it, demand for our product and expertise is increasing. We are watching some partners tightening up, while others are looking to take advantage of the market conditions.

Like many other countries around the globe, Canada benefited from low inflation, low interest rates, fiscal stimulus and general growth in the economy over the last 3 years. Looking at the almost finished first five months of 2019 and economic projections, we clearly see, and expect to continue to see, a slowdown in these items that we have been enjoying. This has been particularly highlighted by an inverted yield curve earlier in the year, potentially signaling a recession possibility in the next 3-6 quarters (making banks and economists concerned).

Oil, which plays a big part in our overall Canadian market is at a very low price point but seems to be recovering to a certain degree. Much of our oil resources are more expensive to extract than in other places in the world. Ongoing political issues surrounding pipeline projects is a daily topic for much of the country. The result of the political turmoil surrounding the pipelines and market price for the oil will have a great impact on our economy going forward.

Trade disputes have also played a very important role in the state of our economy and overall confidence. 2018 saw our closest and most important trading partner, the United States of America, reopen the dialogue of free trade, claiming unfair advantages for Canada in particular around the agriculture and dairy industry; two very important industries for Canada. After a lot of conflict, the North American Free Trade Agreement (NAFTA) was replaced by the United States–Mexico–Canada Agreement (USMCA). This was a huge relief to Canada but still awaits final approval in the USA. Included in these trade disputes between Canada and the USA was the imposing of hefty tariffs on Steel and Aluminum, claiming security risk. This had dramatic effects on those industry exports, which they are dependent on (steel down 24%, Aluminum down 39% in 2018). Thankfully just a couple of weeks ago an agreement has been made and the tariffs lifted. Hopefully, this will allow the industries to recover. Of course, the ongoing trade dispute between the USA and China has ripple effects here and is being watched closely. The daily ups and downs weight heavily on the NYSE and TSX, where many Canadians have substantial investments.

The auto industry is another industry feeling pressure. The beginning of the year had a big announcement that GM would close down major facilities in Ontario, leaving thousands of employees without work. It is yet to be seen how this will impact the local and general economy. Many conversations about converting some factories or coming up with funding programs are ongoing but have only yielded small results so far.

The housing market saw large bubbles over the past couple of years, with the construction industry reaping massive benefits from it. Much of the bubble was localized in Toronto and Vancouver, two of our biggest cities, coming from wealthy Asians paying way above market value for homes. Housing in those cities became nearly unaffordable and forcing the government to take action to slow it down. The construction industry is bracing to see the impact of those measures which included vacant and non-resident purchasing taxes.

Retail in Canada is in line with the US showing a general weakness and shrinking. Many large retailers are highly leveraged and showing sales declines at the hands of online retailers and the general shift in consumer habits. Most insurers are very concerned about this industry in particular, and coverage is becoming a sacred commodity.

Couple small notes specific to Credit insurers:

Coface welcomes a new CEO for North America Oscar Villalonga, previously with GE Capital. GSA met with him for the first time earlier in the month and he expressed a desire to grow and develop strong broker relations. We very much welcome this change at Coface and hope to see it translate into good business.

Euler has been the most aggressive for the last couple of years but is now showing a tightening of commercial and risk underwriting. They continue to be an extremely strong partner but without question, they are showing concern.

The other players in the market seem to be pretty steady, with Export Development Canada continuing to be an important leader in the industry, but indicating specific concern in retail.