Canada Should Tighten Policy as Slack Erased, OECD Says

Canada should tighten monetary and fiscal policies as growth accelerates and the economy approaches full output, the Organization for Economic Cooperation and Development said today.

Gross domestic product will expand by 2.5 percent this year and 2.7 percent in 2015, accelerating from 2 percent in 2013, as exports and business investment increase, the Paris-based OECD said in its global Economic Outlook report.

Bank of Canada Governor Stephen Poloz cut his 2014 growth forecast to 2.3 percent last month, citing weak business spending. While he told lawmakers that the bank is neutral on its next policy move, he also said he couldn’t rule out a rate cut if the economy weakens.

“The Bank of Canada should maintain its current policy stance for the time being,” the OECD said. “However, as slack is taken up and headwinds abate, inflation will move nearer to the 2 percent midpoint, and monetary accommodation should be progressively withdrawn,” it said.

“Fiscal consolidation should continue as planned,” the report also said. While Prime Minister Stephen Harper has pledged to eliminate a budget deficit next year before the next election, governments in Quebec and Ontario, the two largest provincial economies, will take longer to balance their books.

The report didn’t give any specific timeframe for policy actions. Economists surveyed by Bloomberg News forecast the 1 percent overnight policy rate won’t rise before the second quarter of next year. The International Monetary Fund said April 8 Canada should maintain looser policy because there have been few signs of increased exports and company spending.

Housing Investment

Non-residential investment will lead faster output growth, the report showed, quickening to a 3 percent gain this year from 0.8 percent in 2013, and again to 5.2 percent in 2015.

Housing investment will grow 0.2 percent this year and decline by 1.7 percent next year, the OECD said, pointing to signs of “stabilization” in the housing market after years of strong gains. Canadian home prices have gained 90 percent since the start of 2000, second only to a 97 percent jump in New Zealand, the OECD said in its report.

“To reduce housing-related risks to financial stability and improve lender incentives, mortgage-insurance coverage should be limited to only part of lenders’ losses,” the OECD said, without elaborating. The government’s housing agency, Canada Mortgage & Housing Corp., has had some of its activities curbed by the government to minimize risks to taxpayers.

Currency Effect

The faster economic expansion will reduce Canada’s jobless rate from 7.1 percent last year to 6.6 percent in 2015, according to the report, and consumer price inflation will accelerate to 1.8 percent from 1.0 percent over that time, close to the Bank of Canada’s 2 percent target.

Canada’s exporters will benefit from a weaker currency and rising global orders for commodities such as energy, the OECD said. Exports will rise 4.1 percent this year and 6.6 percent next year after being held back by global uncertainty and a harsh winter early this year.

“The increased momentum of the expansion since mid-2013 is set to continue,” the report said. “Private consumption continues to lead the way.”

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