02/14/2013 04:18 EST | Updated 04/16/2013 05:12 EDT

Canada's growth to pick up later in 2013; debt, high housing prices of concern

WASHINGTON - The International Monetary Fund says Canada's economic growth is expected to pick up again later in 2013, but noted that high household debt and high housing prices leave the country vulnerable.

The IMF estimates that growth should be around 2.5 per cent by 2014-15 following a slowdown in the Canadian economy last year.

It notes that consumption and house purchases are expected to contribute less to growth than in the past as households pay down debt and housing prices cool off.

On the positive side, the international agency says business investment and exports will benefit from an expected stronger U.S economy.

But near-term risks remain high from uncertainty on American fiscal policy, turbulence in Europe and lower commodity prices.

The International Monetary Fund cites in its annual staff report on Canada that the country's financial markets have benefited from improved global conditions.

The country's banks are well capitalized and profitable, the IMF says, but remain exposed to possible spill overs from "distress" in the global financial markets.

The IMF said Canada could face some risk that would lower growth.

"While high household debt and still elevated house prices leave Canada more vulnerable to external shocks, a less gradual unwinding of domestic imbalances than in staff forecasts could also lead to lower growth," it said in a report on Thursday.

"Private consumption and residential investment are expected to contribute less to growth than in the recent past," the report said.

The IMF said the housing market cooled off somewhat last year, albeit from very high levels, and the uncertain environment weighed on business investment.

The agency noted that federal and provincial governments moved ahead with plans to return to balanced budgets, so fiscal policy also held growth in check last year.

"At the same time, weak external demand and the strong currency depressed exports," said the report.

The IMF noted that Canada is targeting a balanced budget by mid-decade and net debt, at around 34.5 per cent of Gross Domestic Product, is below most of its international peers.

Outgoing Bank of Canada Governor Mark Carney has said while the export sector may pick up, the Canadian domestic economy is losing steam, particularly in the housing sector. Carney has said that is the reason he believes interest rates will need to stay low for a long time.

For the economy to grow as the Bank of Canada anticipates — by two per cent this year and 2.7 per cent next year — Carney has said exports must return to pre-recession levels and business investments must expand.