Canada Economy Slowest in G-20 Outside Europe, IMF Says

Canada’s economic growth will be the slowest among Group of 20 countries outside Europe as it grapples with a cooling housing market and as policy makers rein in deficits, according to the International Monetary Fund.

The Washington-based lender cut its 2013 Canadian growth forecast to 1.5 percent, from an October estimate of 2 percent, while boosting its projections for Japanese growth to 1.6 percent. The U.S. economy will grow at a 1.9 percent pace this year, while the euro area contracts by 0.3 percent, the fund said today in its World Economic Outlook.

Canada’s economy is expanding at the slowest pace since 2009 as the housing boom that helped lift it from recession cools and high household-debt levels constrain demand. Canadian policy makers, who have sought to stem increases in household borrowing and cut government spending, should be prepared to take growth-supporting measures if the nation’s economy continues to weaken, the IMF said today.

“High household debt and continued moderation of the housing sector will restrain domestic demand,” the IMF said. “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.”

That could mean allowing budget deficits to widen and keeping the Bank of Canada’s policy interest rate at 1 percent for longer, it said.

Automatic Stabilizers

The IMF predicts Canada’s economy will grow 2.4 percent next year. Last year, it expanded 1.8 percent.

Finance Minister Jim Flaherty pledged last month to balance his budget in the fiscal year that begins April 2015, while the Bank of Canada has maintained a bias toward raising its benchmark interest rate for almost a year.

“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 IMF said in its report. “The current monetary policy stance is appropriately accommodative, and the beginning of the monetary tightening cycle should be delayed until growth strengthens again.”

The IMF said risks to its forecasts for Canada are “tilted to the downside,” citing concerns that the weakness in the U.S. and Europe could hurt the economy, as well as the impact of a decline in commodity prices.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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