Canada could suffer a “manageable economic shock” if the US pulls out of NAFTA.
That’s the view of ratings agency Fitch which warns that the likelihood of a US withdrawal is increasing if the talks this week in Montreal do not bring progress.
The agency warns that if the agreement breaks down, there will be a protracted lack of certainty for Canadian businesses, with some sectors highly exposed, but a general deceleration of growth.
It also highlights a slowing of investment intentions as NAFTA risks rise.
While there has been speculation that a failure of NAFTA would see a return of its predecessor, the Canada-US FTA (CUSFTA), Fitch does not see this as a given.
According to research by the Bank of Canada, around half of Canadian goods exports to the U.S. are not subject to NAFTA rules but some sectors, including light truck manufacturing, would potentially face high MFN tariffs in the U.S. market in the absence of a new agreement, putting integrated supply chains at risk.
Fitch is currently estimating growth of the Canadian economy of 3.2% for 2017 but it also expects growth to moderate due to NAFTA uncertainty, high household leverage, the inflated property market and rising interest rates.
More market talk: