- Canadian government has room to provide more fiscal support
- Economic risks are tilted to downside, annual report card says
Canada’s central bank should consider unconventional stimulus if an economy already weakened by low crude-oil prices is hit with another significant shock, according to the International Monetary Fund.
Projected growth of 1.75 percent this year is below average and threatened by low oil prices that could lead companies to halt production, the IMF said Monday in an annual report card. Interest rates must remain low to accommodate a transition to expanded production outside the energy industry at a time of weak global demand and strains in the domestic housing market, the report said.
“They should have an easing bias,” Cheng Hoon Lim, the IMF’s mission chief to Canada, said on a conference call. “The economy would have to have a significant setback, a significant slowdown, in real GDP growth, for another rate cut to occur.”
Bank of Canada Governor Stephen Poloz has limited room to cut his 0.5 percent policy interest rate, and it would be “appropriate” to lay out a case for tools such as negative rates, so-called forward guidance about borrowing costs, or major asset purchases, the Washington-based IMF said. Prime Minister Justin Trudeau can afford to run larger budget deficits if needed, devoted to more infrastructure spending or temporary cuts to personal and corporate taxes.
Canada’s dollar is also “modestly overvalued” by what’s known as the real effective exchange rate, which measures a currency against a global cost index, the IMF said. The economy is “coping well” so far as damage from crude oil below $50 continues to roll in.
Much of the IMF report endorsed Canada’s efforts to sustain growth, such as Poloz’s two rate cuts last year and Trudeau’s decision to introduce new deficit spending after winning power in October’s election. The opposition Conservatives, who Trudeau’s Liberals unseated, have said deficits are a threat to the economy’s health and break a promise to limit the shortfalls the prime minister made during the campaign.
“The federal government’s pro-growth 2016 budget is appropriate,” the IMF report said. “If the economy takes a turn for the worse, additional fiscal easing should be considered, for which there is room.” Any deficit expansion would be aided by a plan for budget consolidation over the medium term, the report said.
The IMF also backed Poloz’s view that deficit spending is a good way to complement the punch from lower interest rates, saying monetary policy shouldn’t “solely bear the burden” of boosting growth. The central bank governor said earlier this year he had a bias to cut rates again absent fiscal stimulus, and has also said monetary policy loses its power as rates head toward zero while looser budgets gain effectiveness.
The IMF’s main forecast is for growth to quicken again to 2.25 percent in 2017 on business investment and consumption spending. Policy makers should also look at other measures to improve the economy such as setting a loan-to-income cap on mortgages to keep hot housing markets in check, and increased government spending on worker skills. Canada’s public training budget is about half of the average across industrialized nations, the IMF said.