IMF trims economic outlook for Canada, globe

In advanced economies, this re-acceleration is expected to happen gradually, starting in the second half of 2013. “Private demand appears increasingly robust in the United States but still very sluggish in the euro area. In emerging market and developing economies, activity has already picked up steam,” it says.

For Canada, the IMF now sees growth of just 1.5% this year, down 0.3 percentage points from its previous forecast; followed by 2.4% growth in 2014 (up 0.1 points from its prior call). “In Canada, the U.S. recovery will support growth, but high household debt and moderation in the housing sector are likely to weigh on private consumption and residential construction,” it says, in its latest outlook.

Risks to this forecast remain tilted to the downside, the IMF notes, citing the threat of adverse fiscal outcomes in the US, further turbulence in Europe, a decline in global commodity prices, and a less gradual unwinding of domestic imbalances, as potential downside threats.

“The main challenge for Canada’s policymakers is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances,” it notes. “Although fiscal consolidation is needed to rebuild fiscal space against future shocks, there is room to allow automatic stabilizers to operate fully if growth were to weaken further. The current monetary policy stance is appropriately accommodative, and the beginning of the monetary tightening cycle should be delayed until growth strengthens again.”

Overall, the IMF points out that policymakers in the advanced economies “have successfully defused two of the biggest short-term threats to the global recovery, the threat of a euro area breakup and a sharp fiscal contraction in the US”; which, it says, has helped financial markets rally, and improved financial stability.

The financial market rally has, in turn, been helping economic recovery by improving funding conditions and supporting confidence, the IMF says, and yet “growth prospects appear broadly unchanged,” it adds. The annual growth forecast for advanced economies in 2013, at 1.25%, is no better than 2012, it says. However, after a weak first half, it expects real GDP growth in the advanced economies is projected to rise above 2% for the rest of the year and to average 2.25% percent in 2014, spurred by U.S. growth of about 3%.

The major emerging market economies are already seeing growth pick up, it notes. “With consumer demand resilient, macroeconomic policy on hold, and exports reviving, most economies in Asia and sub-Saharan Africa and many economies in Latin America and the Commonwealth of Independent States are now seeing higher growth,” it says. “The recovery should again gain speed in emerging Europe as demand from advanced Europe slowly picks up.”