IMF says Canadian economy to pick up speed, but many risks remain

OTTAWA • Canada’s economy will pick up speed in 2014, thanks in great part to stronger growth in the United States, as both countries shake off a chilling start to the year, the world’s key lending agency said Tuesday.
But the International Monetary Fund, in its latest analysis of global growth and trends, cautioned external risks still exist for both countries and urged the Bank of Canada, in particular, to hold off raising its key interest rate until solid growth takes hold.

“Although external demand could surprise on the upside, downside risks to the outlook still dominate, including from weaker-than-expected exports resulting from competitiveness challenges, lower commodity prices, and a more abrupt unwinding of domestic imbalances,” the Washington-based IMF said in its report.

“Indeed, despite the recent moderation in the housing market, elevated household leverage and house prices remain a key vulnerability. With inflation low and downside risks looming, monetary policy should remain accommodative until growth gains further traction.”

The Bank of Canada’s trendsetting lending rate has been at a near-record low of 1% since September 2010. In October, bank governor Stephen Poloz dropped the pro-rate-hike stance, saying instead that policymakers had adopted a neutral position — meaning borrowing costs could eventually go down if the economic data deteriorates.
The IMF said economic growth in Canada should reach 2.3% this year — although harsher-than-usual winter weather in North America limited initial growth — after a 2% advance in 2013, and will expand by 2.4% in 2015, “thanks to stronger external demand and rising business investment.”

The outlook for Canada this year is slightly less optimistic than the 2.5% forecast by the Bank of Canada and generally supported by private-sector economists. The central bank is calling for 2.5% growth again in 2015.
The recurring concern of the IMF is the still-to-be-realized rebalancing of growth from household consumption and residential construction toward exports and business investment, an issue that also remains a concern of Canadian policymakers. Even so, the agency pointed to healthier growth in the U.S. that should help boost exports and business investment here.

Inflation has been running below the Bank of Canada’s 2% target, the midway point of its 1%-to-3% comfort range. The IMF says Statistics Canada’s consumer price index should rise at a pace of 1.5% this year and 1.9% in 2015. CPI was 1.1% in February. Canada’s sluggish employment market is expected keep the jobless rate at 7% this and 6.9% the year after that, the agency says. In March, unemployment was running at 6.9%.
The IMF placed Canadian growth third among its industrialized counterparts for both this year and next — behind the U.S. as well as the U.K., which is forecast to expand 2.9% in 2014 and 2.5% in 2015.

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