Fitch: North America Sovereign Outlook Stable as Growth, Government Debt Ratios Steady

Fitch Ratings expects economic growth in North America to improve in 2016. The U.S. economy will grow 2.5%, the same rate as in 2015, while Canadian growth will improve to 2% in 2016 from just 1% in 2015. Growth in both the U.S. and Canada will remain dependent on consumption, but household balance sheets appear more stretched in Canada, where overvalued housing markets and high household debt pose risks in the case of an economic downturn - not our base case.

We expect the U.S. Federal Reserve to begin raising interest rates in December 2015 and proceed at a gradual pace, without leading to a sharp slowdown in credit growth or economic activity. By contrast, the Bank of Canada is likely to keep its policy rates on hold at 0.5% or even cut, as the economy adjusts to the energy price shock.

United States and Canada are both rated 'AAA', but share one credit weakness: a relatively high gross government debt burden. Debt dynamics are slightly positive in Canada and point to a gradual, medium-term deterioration in the U.S. without offsetting action.

The short-term outlook for the U.S. public finances is relatively benign. The U.S. federal budget deficit will shrink further to 2.3% of GDP in FY2016, having fallen to 2.5% of GDP in FY2015. Both federal and general government debt/GDP have stabilized and should fall in 2016. Debt-ceiling tail risks have been dispelled by an agreement to lift the debt ceiling until March 2017. A modest, USD80 billion rise in spending limits for FY2016 and FY2017 agreed to by Congress in October does not affect the outlook materially.

However, the debt burden will start to rise again from 2018. A medium-term adjustment to put public debt/GDP on a declining path, increasing U.S. resilience to shocks, faces hurdles in Congress. The U.S. has the world's deepest capital market and few financing constraints - giving it high debt tolerance - but it is the most highly indebted 'AAA' sovereign, with debt exceeding 100% of GDP.

On the basis of gross general government debt, Canada is the second most indebted 'AAA' sovereign (net debt is lower at 36% of GDP), and the rating has limited tolerance for further increases. We expect gross general government debt to trend down from 88% of GDP in 2015, with the general government running modest deficits (FY2015: 1.5% of GDP). The newly-elected Liberal government will run a looser fiscal policy at the federal level, yet the starting point is relatively strong, with a deficit of 0.3% of GDP expected this fiscal year, and we do not expect a dramatic short-term impact on public finances.