Uncertain global economy to constrain Canada’s growth: IMF

However, the IMF says that uncertainty about the global economic environment, and in particular the U.S. fiscal cliff, is likely to constrain growth in the current quarter and the next one.

“A positive resolution of that uncertainty and a strengthening of the U.S and global economy from mid-2013 would boost the Canadian economy through stronger exports and business investment. On the other hand, the contribution to growth from private consumption and housing will likely be lower than in the past few years, as high leverage is expected to contain household spending and residential investment and house prices are projected to fall gradually to more sustainable levels,” it says.

Overall, the IMF is forecasting GDP growth of just below 2% in 2013, accelerating to around 2.25% in 2014. Although, it sees the risks to this outlook tilted to the downside. “A stronger pace of fiscal consolidation in the United States relative to our base case scenario would reinforce the external headwinds to the Canadian economy,” it cautions.

Also, the European sovereign debt crisis remains a concern, and the impact of any negative shocks on the Canadian economy would be exacerbated by the elevated levels of household debt, “which limit the scope for Canadian household to smooth consumption by borrowing and might force them to deleverage in the face of tighter financial and economic conditions,” it says.

The IMF doesn’t foresee a bust in household consumption, but does allow that the unwinding of domestic imbalances could prove more disruptive than anticipated.

“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 says. Longer term, it says that policymakers should concentrate on the continued reform of financial regulation and supervision, and that they should continue to address the long-term public spending pressures from an aging population and the rising cost of providing health care.

The Bank of Canada’s current monetary policy stance is “appropriately accommodative”, the IMF says. It suggests that a gradual monetary tightening should start in late 2013, when growth is expected to accelerate.

On the fiscal front, it notes that, “while the consolidation plans of the federal government are well advanced and a budgetary balance by 2015 is well within reach, balancing the budget may require further efforts in some of the largest provinces, where the current consolidation plans rely on ambitious spending cuts, including freezes on wages that will be difficult to sustain in the medium term.”

The IMF also suggests that policymakers should consider further measures to limit the buildup of household debt, including possibly imposing tighter loan-to-value limits for first-time home buyers, setting lower caps on debt-service-to-income ratios, and tighter LTV limits on refinancing activity.

Bank regulators should consider publishing the results of the Canadian banks’ stress tests, it says, “as this would promote a better awareness of the risks, induce more realistic risk pricing, and enhance market discipline.”

It’s also important to continue monitoring the risks to financial stability from the non-bank sector, it says, particularly as the low interest rate environment may push companies and pension plans to take on more risk. “While there is little evidence that the search for yield has led to excessive risk taking so far, it is essential to remain vigilant,” it says.

Finally, it suggests that policymakers continue to push for a national securities regulator. “Efforts to establish a single securities regulator for Canada should continue, as this would reduce compliance costs, simplify systemic risk monitoring, and facilitate coordination with other agencies and policy intervention,” it says.