Canada’s growth outlook positive despite lower oil, IMF says

“Canada’s recent growth performance has been solid, alongside a stronger U.S. recovery,” the report says. However, it also notes that “the composition of growth has not yet shifted away from private consumption and residential investment to generate a broader, more durable recovery.”

Moreover, the IMF says that lower oil prices will be a drag on growth through weaker investment in the energy sector. It also estimates that the housing market remains between 7% and 20% overvalued. Although it also says that it sees some “welcome signs of cooling” in the housing market. The IMF says its staff continues to expect a “soft-landing” for housing, as higher interest rates and other factors temper demand.

“Growth momentum is expected to continue this year, despite substantially lower oil prices, and become more balanced with a cooling housing market,” it says.

“The stronger U.S. recovery, which is expected to continue, is leading to higher non-energy exports and supporting investment. These factors should mostly offset a moderation of private consumption and residential and energy investment as U.S. interest rates rise, low oil prices persist and households remain highly indebted.”

Yet the report notes that downside risks to the outlook have risen “in light of further oil price declines, adding to the risks of weaker global growth and still-unfolding effects from the unusually large fall in oil prices,” it says. Also, domestic vulnerabilities in housing markets and the household sector “remain elevated but contained from a financial stability perspective,” it adds.

While it sees the government on track to achieving a balanced budget, the IMF says that federal authorities “should consider adopting a neutral stance given past consolidation gains and downside risks to growth. Such a stance would still be consistent with achieving the longer-term goals on public debt reduction.”

The report says that the Bank of Canada’s recent surprise decision to cut interest rates is in line with its belief that monetary policy should remain very supportive. The IMF says that its directors support the Bank of Canada’s decision to cut rates, but they “encouraged the authorities to continue monitoring the impact of monetary policy on household debt and house prices.”

They also noted that “additional macro-prudential policy action may be needed if household balance sheet and housing market vulnerabilities resume rising, in particular tighter standards for uninsured mortgages.”

While it approves of the government’s efforts to curb its exposure to the housing market, the IMF also called for “further action to ensure appropriate risk retention by the private sector and, in the longer run, to re-examine the dimensions of extensive government-backed mortgage insurance.”

“Overall, maintaining monetary accommodation along with gradual fiscal consolidation at the general government level would be conducive to achieving a growth composition with stronger exports and, thereby, investment in the economy, while targeted macro-prudential policies would help address housing sector vulnerabilities as needed,” it concludes.

Editor’s note: For an outlook on how Canada’s provinces and territories will fare in the year ahead, see Report on the Nation in the February 2015 issue of Investment Executive.