The International Monetary Fund sees Canada’s economic growth slowing in the year ahead as household debt levels weigh on the economy, and it says there’s still room for further monetary and fiscal stimulus if the economy slows too, much.
In its latest report on Canada, the IMF forecasts that GDP growth for this year will finish at just 2.2%, down from 3.2% last year, and it foresees growth slowing further to just 1.9% in the year ahead. “Economic growth is expected to be moderate in the near term, with significant uncertainty related to the unsettled external environment,” it says.
The IMF says that personal consumption and real estate investment growth is expected to be relatively subdued due to high household debt levels, and regulatory measures taken to contain mortgage credit growth. Business investment is expected to be the key to sustaining growth, it notes.
The report says that external threats to growth — including further turbulence from Europe and its impact on global financial markets — remain the primary source of risk, it adds. And, domestically, high household debt levels, coupled with elevated house prices, are the main vulnerability.
“While Canada’s medium term outlook remains broadly favorable, near term downside risks are high due to the financial market turmoil in Europe and rising household indebtedness. Accordingly, policymaking should remain flexible and pragmatic in the period ahead,” it says.
The IMF endorsed the Bank of Canada’s conduct of monetary policy, and notes that there is scope for further monetary easing if the economy weakens.
It also supports the government’s plan to gradually remove fiscal stimulus and return to fiscal balance over the medium term, but it stresses that provincial governments also need to move ahead with fiscal consolidation. That said, it also notes that there is still room for further fiscal stimulus too, if the economic outlook deteriorates.
Finally, it cautions policymakers to continue closely monitoring risks, including the risks associated with a prolonged period of exceptionally low global interest rates; it notes the importance of reversing the gradual loss of external competitiveness, particularly through efforts to improve the business environment and boost productivity; and, it stresses the need for a concerted effort to contain the rising health care costs associated with population aging.