Canadian Economy: IMF Says Don't Overdo It On Austerity

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IMF CANADA CHRISTINE LAGARDE
International Monetary Fund head Christine Lagarde. The IMF is advising Canadian policy-makers against pulling too hard on the reins of austerity, saying in a new forecast that the economy remains weak and vulnerable to shocks. (EMMANUEL DUNAND/AFP/Getty Images) | Getty Images

OTTAWA - With global finance ministers gathering in Washington this week, the International Monetary Fund is advising Canadian policy-makers against pulling too hard on the reins of austerity while the economy remains weak and vulnerable to shocks.

The IMF said Tuesday that Canada's economy will likely slow to about 1.5 per cent this year, down 0.3 points from its earlier expectation and also from 2012 growth, before picking up to 2.4 per cent in 2014.

As well, the Washington-based financial organization reduced its expectation for overall world growth by 0.2 points to 3.3 per cent for this year, following the rough ride in 2012.

In a conference call with reporters, a senior Canadian government official said measures to give a kick-start to global output would be the main topic of discussions during the IMF meetings on Friday and Saturday, which will be attended by Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney.

The official, who asked not to be identified, said Flaherty will also be holding his first bilateral with newly-named Treasury Secretary Jack Lew and will almost certainly bring up the controversial Keystone XL oil pipeline that Canada is eager to build but has yet to receive a green light for in Washington.

Another key topic of discussion, he said, was currency manipulation, but added that the problem appears to be less acute now than last January when finance ministers agreed to play by the rules.

The U.S. has hinted of concerns over aggressive monetary policy loosening that has succeeded in devaluing the yen, thereby giving Japanese exports an advance in world markets, but the official said Canada supports efforts to kick-start the Japanese economy, the world's third largest.

In the new outlook, the IMF said the Canadian economy is facing both external and internal risks, including a cooling housing market and record-high household debt.

"The main challenge for Canada's policy-makers is to support growth in the short term while reducing the vulnerabilities that may arise from external shocks and domestic imbalances," the body advises.

"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 statement appears to walk the line between backing Finance Minister Jim Flaherty's latest stand-pat budget which did not add significantly to already announced austerity measures, while also stressing that if conditions deteriorate, Ottawa should loosen economic stabilizers such as unemployment insurance and other support systems to promote growth.

The report did not mention Flaherty's self-imposed deadline of balancing the budget by 2015, when Canada will have its next federal general election.

The IMF also advised the Bank of Canada not to tighten monetary policy until the economy improves.

"The current monetary policy stance is appropriately accommodative," it says.

"And the beginning of the monetary tightening cycle should be delayed until growth strengthens again."

Central banker Carney has mostly withdrawn language suggesting interest rates hikes were around the corner, although the guidance still nominally points to higher rates.

That may change as early as Wednesday morning's next interest rate announcement, however, when the bank is also expected to bring its economic growth projections — 2.0 per cent in 2013 and 2.7 per cent in 2014 — more in line with the IMF and the economic consensus.

The IMF report sees few improvements for Canada's economy in the next two years, with unemployment remaining near the current 7.2 per cent level throughout, and the country's current account balance with the rest of the world remaining in a significant deficit.

As well, the IMF no longer views Canada as the growth leader of the G7 economies. While better than the European members, Canadian growth is projected to play second fiddle to the U.S. in 2012, 2013 and 2014. Growth in "other advanced countries" not in the G7 club, such as the Scandinavian nations and Australia and New Zealand, are also projected to outperform Canada.

Going forward, it predicts the Canadian economy will continue to be held back by high household debt levels and a cooling housing market.

"Business investment and net exports will benefit from the U.S. recovery, but high household debt and continued moderation of the housing sector will restrain domestic demand," it says.

Bank of Montreal chief economist Doug Porter says the upside for the Canadian economy would be a strong recovery south of the border, even if that places Canadian growth behind the U.S. He notes Tuesday's numbers showing U.S. housing starts topped one million in March for the first time since 2008 as encouraging.

Also encouraging was the Canadian manufacturing report released by Statistics Canada just prior to the IMF analysis. Factory sales surged a consensus-shattering 2.6 per cent in February, although that still left manufacturing down by 0.3 per cent over the past three months.

Globally, the IMF says economies have stabilized in advanced economies and picked up in emerging and developing nations following a slowdown in the first half of 2012 but the damage has left its mark.

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