The International Monetary Fund (IMF) has trimmed its GDP forecasts for Canada slightly amid the ongoing drag caused by lower oil prices.
In its latest global forecasts, the IMF says that it sees 2.2% growth for Canada this year, slowing further to 2.0% next year. Both calls are down 0.1 percentage points from the previous forecast. The IMF notes that lower oil prices “pose downside risks to the Canadian economy.”
Indeed, even this relatively weak forecast faces downside risks “because the unusually large fall in oil prices could further weaken business investment in the energy sector and lower employment growth,” the IMF says.
The forecast notes that Canada’s recent economic performance has been solid, powered by a stronger recovery in the U.S., the depreciation of the Canadian dollar, and high demand for energy. “These developments have led to a welcome pickup in exports but have yet to translate into strong investment and hiring,” it says.
On the policy front, the IMF suggests that maintaining accommodative monetary policy, coupled with gradual fiscal consolidation, should help rebalance growth away from household consumption and toward business investment “to generate a broader, more durable recovery.” Additionally, it notes that “targeted macroprudential policies would help address high housing sector vulnerabilities.”
Overall, the IMF’s global forecast remains broadly unchanged. It still sees 3.5% growth in 2015, rising to 3.8% in 2016. “Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries,” it notes.
In emerging markets, it says that negative growth surprises for the past four years have diminished expectations for medium-term growth prospects. Whereas in advanced economies, aging populations, weak investment, and lackluster productivity growth are dimming growth expectations.
However, advanced economies are generally benefiting from lower oil prices, the IMF says. It forecasts U.S. growth to exceed 3% in 2015–2016; it says growth in the euro area is showing signs of picking up too, supported by lower oil prices, low interest rates, and a weaker euro; and, that growth in Japan is also projected to pick up, again driven by a weaker yen and lower oil prices.
Overall, it sees the risks to global growth tilted to the downside, although the weakness in oil prices poses a significant upside risk, it notes. This is offset however, by a range of downside risks, including geopolitical tensions, financial market volatility, and risks of stagnation and low inflation in the advanced economies.