IMF sees Canada economy reviving

The mix of that growth is expected to change, however, with private consumption and residential investment contributing less, as households deleverage and the housing sector continues to cool off, it says. But, business investment and net exports are expected to take up the slack, particularly as the U.S. economy recovers.

Despite the relatively positive outlook, the IMF notes that short-term downside risks remain elevated, “in particular from continued uncertainty on U.S. fiscal policy, further turbulence from Europe, and a decline in commodity prices driven by an economic slowdown in emerging markets.”

Domestically, it cites high household debt and elevated house prices as risks too. While it doesn’t expect a U.S.-style housing crash, the IMF says that a faster-than-expected unwinding of domestic imbalances could lead to lower growth, and it also leaves Canada more vulnerable to external shocks.

In terms of policy, the IMF says that Canada’s main challenge “is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances.” It finds that the current monetary policy stance is appropriate, and that the tightening cycle should start only when growth strengthens again.

The IMF also endorses medium-term fiscal consolidation plans, and stresses the importance of moving ahead with fiscal consolidation in some of the larger provinces. “Placing the general government debt on a sustainable long-term path would require reforms that durably contain spending and boost revenues. Renewed efforts at the provincial level to slow the growth of health care spending would be particularly important in this regard,” it says.

The IMF also commended the financial regulatory system, and the commitment to implement the international financial reform agenda. Canada’s banks are well capitalized and profitable, it notes, “but remain exposed to potential spillovers from renewed distress in global financial markets which could lead to higher funding costs and liquidity strains.”

And, it also continues to call for a single securities regulator, noting that this would reduce compliance costs, simplify the monitoring of systemic risk, and facilitate coordination with other agencies and policy intervention. It says Canadian authorities noted that efforts to adopt a single securities regulator for Canada are continuing, despite the Supreme Court of Canada’s rejection of its last proposal.

@page_break@ In terms of other reforms, the IMF says that increasing labour productivity remains a priority; and, it says it will be important to continue pursuing measures that boost innovation, promote trade, and attract foreign direct investment. “Higher productivity growth is essential for Canadian firms to respond to persistent competitive pressures from a strong currency and the opening of global trade markets to emerging and developed economies,” it says, stressing that “there is room for a better, more targeted, support to investment in research and development and for measures aimed at increasing labour mobility and retrain the workforce towards sectors experiencing labor shortages. Continued efforts in opening up new markets, through multilateral and bilateral trade agreements, could also boost competition and innovation.”