Canadian economic growth will slump to just 1.6% in the years ahead, predicts the Organization for Economic Co-operation and Development in its latest survey of Canada, and it calls on policymakers to seek structural reforms and curb public spending.

The OECD notes that Canada did weather the global financial crisis, and the subsequent recession, fairly well. However, it also observes a rapid rise in household debt. “The initial rebound in activity has been very strong, helped by fiscal stimulus, but an increasing number of households may become vulnerable as interest rates increase,” it says.

And, as stimulus measures are withdrawn, the recovery will likely weaken, it adds. Nevertheless, the OECD recommends that the Bank of Canada keep raising rates, so that it is approaching a neutral policy by the end- of 2011.

“Once excess capacity has been worked off, the economy’s trend growth rate is projected to be much lower over the medium term than it has been in the past as changing demographics slow the growth of the working-age population,” the OECD says. In particular, it predicts that the potential rate of economic growth is projected to decline and to average only 1.6% annually from 2010 to 2017, more than a full percentage point less than over the past decade.

“This outlook underlines the importance of carrying on with structural policy reforms that can boost the economy’s potential rate of growth,” it says, citing the need for policies that enhance the flexibility of the labour market, reduce barriers to foreign ownership, strengthen competition in network industries and professional services, and reduce work disincentives in the income-support system. The financial system also needs policy attention, it says.

For one thing, securities regulation needs to be strengthened, the OECD advises. It points to the collapse of the non-bank asset-backed commercial paper market during the financial crisis, and concludes, “the root problem was non-transparency and poor practices in the marketing of such paper to investors, which arose under fragmented and poorly enforced provincial regulation.”

“Tougher disclosure rules and better enforcement are the solution. More generally, a broader and deeper nation-wide capital market is needed to attract foreign capital and complement bank intermediation as a basis for enterprise growth and innovation,” it says, adding that “it is important to proceed with plans to establish a single national securities regulator, whether or not continued efforts to get all provinces on board succeed.”

Additionally, it calls on the Canadian government to follow through on its pledges to reduce greenhouse-gas emissions, to slow spending to put the public finances on a sustainable path, and to work toward a more stable, permanent, rules-based system for determining provincial transfers.

In particular, it points to the need to control healthcare spending. “With health already accounting for around half of total primary provincial spending, meeting the fiscal and demographic challenges will require that the growth of public health spending be reduced from an annual rate of about 8% seen over the last decade toward the trend rate of growth of nominal income in coming years (estimated to be less than 4% per year), the only alternative being to squeeze other public spending or to raise taxes or user charges,” it says.

IE