The Canadian economy has not yet undergone a necessary rebalancing away from household consumption and towards stronger exports, says the International Monetary Fund (IMF).
The IMF issued its latest report on Canada today, which warns that, “The composition of growth does not yet point to the much needed rebalancing from household consumption and residential construction towards exports and business investment.”
For example, it notes that non-energy exports remain well below the levels reached after earlier recessions, despite a decline in the loonie. “These low export levels reflect not only the slower recovery in external demand but also increased challenges to competitiveness.” It also says that house prices remain overvalued.
Nevertheless, the IMF says that economic growth is expected to accelerate in 2014, and that exports should benefit from the projected pick-up in U.S. growth. Over time, stronger exports and business investment is expected to more than offset the slowdown in private consumption and residential investment, the IMF adds.
However, it warns that there are still significant downside risks to the outlook, including the impact of the U.S. Federal Reserve Board’s exit from quantitative easing; protracted weakness in the euro area; and lower-than-expected growth in emerging markets, which could also hurt commodity prices. It also says that high household leverage and high house prices could also amplify the impact of adverse external shocks.
Alternatively, faster acceleration of the U.S. economy and further strength in the housing market pose upside risks to its forecast, the IMF says; although it adds the stronger house prices would “imply more risks down the road.”
The report also notes Canada’s banking sector remains well capitalized and has low levels of nonperforming loans. And, it says that stress tests “suggest that major financial institutions (banks and insurance companies) would continue to be resilient to a severe stress scenario, although risks remain from the continuation of a low interest rate environment.”
Finally, the IMF says that the regulatory and supervisory framework is strong, and that progress has been made in strengthening it; although it notes that there is no single body with an explicit mandate to take a comprehensive view of systemic risks or to undertake crisis preparedness. “Improving cooperation between federal and provincial authorities would further reinforce system wide oversight arrangements,” it says.