Source: The Canadian Press

The risks to Canada’s economic recovery are increasing and could curtail growth in the future, the International Monetary Fund warns in a new outlook for the country.

The Washington-based international institution says Canada’s economy will grow by about 2.3% next year, after a front-loaded 3% advance in 2010.

It sees unemployment remaining at 7.9% next year.

Overall, the fund’s end-of-the-year report on Canada gives a generally positive assessment, especially in comparison to other countries.

But it cited several “key risks” that could restrain the recovery and growth in employment, including an overheated housing market, high household debt and the weak recovery in the U.S.

“Risks are elevated and tilted to the downside with high household debt levels the main domestic risk, and a weaker U.S. outlook the largest external risk,” the report states.

In a conference call, IMF’s Canadian mission chief Charles Kramer said the good news is that an economic collapse in Canada is not the most likely scenario, and if a downturn were to occur, Ottawa and the Bank of Canada have room to respond.

He noted that unlike other countries, the central bank’s policy interest rate is at 1% — not zero — so governor Mark Carney has room to cut.

And Ottawa’s fiscal position is also far better than many other advanced countries, with relatively low net debt to gross domestic product.

Kramer said one option for the government in case of a sudden downturn is to accelerate the pace of corporate tax cuts, which are scheduled to be reduced to 15% in 2012, and to increase infrastructure spending.

“It’s important to remain vigilant to any risks that could emerge. After our discussions in Ottawa and Toronto we have confidence that the authorities are very much on the same page with respect to that,” Kramer told reporters.

Kramer said Ottawa’s decision to “smooth” the withdrawal of infrastructure spending to the end of October was welcome given the moderate recovery.

The report flagged several concerns in the domestic economy, however, including the overheated housing market and household debt, which reached a record 148% of disposable income.

It said Canada’s housing sector has reached its peak and may be due for a correction, although a collapse is not likely.

“That said, with most mortgages being ‘rollover’ mortgages with terms of at most five years, any future interest rate increases could put additional strains on already highly indebted households,” it adds.

Finance Minister Jim Flaherty and Carney have also recently expressed concern with debt levels, and have urged Canadians to ensure they can afford to meet mortgage payments once interest rates rise.

Another key risk to Canada is the sub-par U.S. recovery, the report states, given the dependence of manufacturers and exporters to the southern market.

The IMF said it supports the Harper government’s plan to eliminate the deficit in five years, calling the plan credible.