Why Canada’s recovery is still tenuous: IMF

By Staff, with files from The Canadian Press | July 14, 2017 | Last updated on July 14, 2017
3 min read

The International Monetary Fund has given the Trudeau government a passing mark for its handling of the economy since coming to power, but warns that “more difficult challenges lie ahead.”

In a release, and in an annual report released by the Washington-based organization on Thursday, the IMF credits the government “for successfully reinvigorating the Canadian economy […] .” But it also notes that “the ongoing recovery [in Canada] is skewed toward consumption. At the same time, there are uncertainties around the economic outlook.”

In its report, the IMF says, “To support the economy, the government introduced tax cuts for the middle class, expanded family benefits, and raised infrastructure spending.” This spending, combined with the Bank of Canada’s historically low interest rates, “has succeeded in revitalizing the economy after a tough year in 2015,” the IMF says.

In its release, the IMF suggests the best path forward would be to ensure the fiscal policy remains “expansionary in 2017, while in 2018, as the output gap closes, no further increase in the deficit would be required.” (Note that the Liberals said in their last federal budget that they expect to rack up $142 billion in new debt via bond issuance.)

On monetary policy, the IMF says, “[…] Monetary policy should stay accommodative and be gradually tightened as signs of durable growth and inflation pressures emerge.” The IMF’s review and report was completed prior to the Bank of Canada’s July 12 rate increase to 0.75% — the first hike seen in seven years — but released afterward.

Read: Big banks follow BoC, raise mortgage rates

Cheng Hoon Lim, the IMF’s mission chief for Canada, said the rate increase reflected the fact the economy has been doing well over the past few months, though he advised the Bank of Canada to take things slow.

“We welcome the good news on the economy and note that even with the rate hike, monetary policy remains appropriately accommodative,” Lim said. But, “given the considerable uncertainty around the growth and inflation outlook, the Bank should continue to take a cautious approach in further adjusting the monetary policy stance.”

At a news conference on Parliament Hill, Prime Minister Justin Trudeau touted his government’s approach to the economy. “We’re going to continue to deliver on the commitments and the promises we made in the last election and in the throne speech we presented 18 months ago,” he said.

He added, “Now is not the time to change from the strong approach that’s delivering for Canadians. Now is the time to continue on the hard work we’re doing to help Canadian families.”

Yet, Trudeau can’t forget the challenges that lie ahead.

The IMF has raised alarm bells about the amount of uncertainty in Washington and how that could impact Canada’s economy over the long term. Among the issues is whether the Trump administration would significantly cut corporate taxes, which would make Canada less attractive to investors, and the future of NAFTA.

The IMF also cited major concerns about Canada’s housing market, warning any sudden decline in prices could send shockwaves across the country. “The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy and increases contingent claims on the government,” the report says.

Read: Royal LePage sees 9.5% national price gain this year

Further, there were also worries about the impact of further oil price declines. And, despite signs the Canadian economy is starting to turn around, the IMF found two important engines of growth had not met expectations: private sector investment and non-energy exports.

Read: June’s oil fallback is ‘overreaction,’ says economist

Overall, the IMF suggests in its release, “Policy choices will therefore be crucial in shaping the outlook and reducing risks.” Read the full IMF release about its Canada consultation.

Also read:

Canada’s GDP and biz sentiment provide a reason to celebrate

Hits and misses in the energy sector

Are central banks too optimistic about growth?

Late cyclicals and the loonie: what’s next?

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Staff, with files from The Canadian Press

The Canadian Press is a national news agency headquartered in Toronto and founded in 1917.