Transcript of a Conference Call on Canada’s 2009 Article IV Consultation

March 11, 2009

Washington, D.C., March 11, 2009

MR. KRAMER: Good morning. I am Charles Kramer. I am the IMF Mission Chief for Canada and with me here is Marcello Estevao, my Deputy in the IMF’s North America Division. We just spent about two weeks in Ottawa and Toronto for our 2009 Article IV Consultation discussions, and this morning I will give you a quick sense of our main findings which are reflected in our concluding statement and the accompanying press release.

The discussions, as you can imagine, were very much focused on how Canada is faring in the global crisis and how it is positioned to weather it, looking ahead. The bottom line is that Canada is positioned quite well, and there are three reasons why.

First, Canada has a track record of sound macroeconomic policies. In the run-up to the crisis, Canada ran eleven straight years of fiscal surpluses, which has given it the lowest net debt to GDP ratio in the G-7.It has also maintained price stability through a sound monetary framework. So it entered the crisis from a strong position.

Second, Canada has responded proactively to the crisis. It has launched a strong and well-timed fiscal stimulus, and the Bank of Canada has substantially used monetary policy, both of which will support demand.

Third, Canada has maintained and preserved financial stability. Banks are strongly regulated and conservative by nature, so they have avoided the toxic assets we have seen in other banking systems. Thanks to this, they have not needed public rescues as in so many other countries. This is especially important because macroeconomic policy is far more effective when the banking system is functioning well.

Looking ahead, though, like many other countries, Canada will still go through an economic downturn as demand shrinks globally. The main thing policymakers need to do in this environment is be watchful and be prepared to respond as necessary. Even though, with the policies in place, now we think that Canada is better placed than most countries to weather the international financial turbulence and global recession.

And with that, why don’t we turn to your questions.

QUESTION: Your report says the output is likely to contract significantly in the near term. You have predicted a 1.2 percent contraction for this year. Are you looking at something lower?

MR. KRAMER: I think you’re referring to our January World Economic Outlook update.


MR. KRAMER: Likely, the forecast for a number of countries, including Canada, will be marked down somewhat from that. We are still in the process of formulating our forecast, but we see, worldwide, a lot of very negative data in the recent period, and so likely those would come down. We cannot say quite how much yet because we are in the process still of formulating them, but it is likely that for a number of countries we will see lower growth.

QUESTION: Good morning, gentlemen. In your concluding statement you mention that medium-term inflation expectations have been relatively stable. I was wondering whether you could indicate why you think that, what numbers are you looking at, what indicators you are looking at. You also mention that the Bank of Canada has kept open the possibility of using more aggressive measures. Can you elaborate on that as well? What exactly are you referring to and what the Bank of Canada has been telling you on that?

MR. KRAMER: On the first measure, we look at a variety of indicators, but among them are forecasts of inflation. In fact, if you look on the Bank of Canada’s web site, you’ll find a page that includes three to five years and longer inflation expectations, and you’ll see that those have been quite stable at 2 percent.

Near-term inflation expectations have come down a bit obviously because the economy is slowing, inflation is slowing worldwide and, obviously, the decline in commodity prices is having its effects on headline inflation. But the sense is that medium-term inflation expectations are quite stable.

On the second issue, I believe you are referring to the statement by the Bank of Canada at its recent monetary policy meeting, that it would consider credit and quantitative easing measures in the future. Likely, this is along the lines of what we have seen in other countries, the United States and the United Kingdom. The precise form of those remains to be seen at this stage.

QUESTION: With Canada so well positioned going into this crisis, do you think it’s poised to emerge from a recession more quickly than other countries?

MR. KRAMER: I think it’s difficult to say at this point—probably better positioned than otherwise. I think for a variety of countries this is going to be not so much a V-shaped recession but more of a U-shaped recession. I think it importantly depends on the outlook for the United States, and, as we have said, the key question is what is done on the financial sector and, associated with that, the effectiveness of macroeconomic policies in boosting the economy. So while there’s a good deal of uncertainty, we would say that Canada is better positioned than most to weather this recession relatively well compared to other countries.

QUESTION: In your statement you said, more generally, that policymakers could focus on risks to individual institutions. Do you see any individual institutions under greater pressure than others? Do you see any particular banks in worse shape among all of them?

MR. KRAMER: No, we don’t. We don’t have concerns about any individual institutions. From the Fund’s macroeconomic point of view, the key, not just for Canada but more generally in terms of financial stability and financial surveillance, is to focus on the system but also on the role of various institutions in the system and try to put the pieces together in some sense. But, no, we don’t have concerns about any individual institution.

QUESTION: Canada, you say, will weather the crisis better than most, but it is thoroughly dependent upon what happens in the United States. What is your expectation of recovery for the United States and for trade with Canada?

MR. KRAMER: Well, in the United States, as I mentioned, the outlook very much depends on a solution to the financial sector problems that we are now seeing. And, as our Managing Director said, there is now a plan in place. The details are emerging. The key there will be to implement it quickly, and the outlook for the U.S. will very much depend on that plan and the efficacy of that plan. For the United States, even with a relatively reasonably soon fix to the financial system, though, the outlook is for a somewhat protracted and potentially deep recession. The precise timing of the recovery and its depth remain to be seen. But I think we see the beginnings of that in the fourth quarter numbers for the U.S. GDP where the economy contracted by 6.2 percent, and going into 2009 we continue to see a stream of very negative news on the housing front, on employment. The latest figures have employment dropping by 651,000, the unemployment rate continuing to rise. So there will still be some considerable contraction in trade likely in the United States, and of course that will have effects on Canada because 75 percent of Canada’s exports go to the United States. We would expect the continued downturn in the U.S. to weigh on demand in the U.S. and, hence, on demand for exports from Canada.

QUESTION: So, however prudent policies are and however well managed the financial system is in Canada, there are tough times ahead for quite a long time to come because of its dependence on trade with the United States?

MR. KRAMER: Well, what we’ve seen, and the Fund has done quite a bit research on this in its World Economic Outlook and other forums, is that financial crises and for, in particular here, the United States, financial crises tend to lead to longer and deeper than otherwise recessions. So we would expect a slow and somewhat protracted process of recovery in the United States under current circumstances, with financial strain still quite pronounced in the United States now and likely to remain so into the future for some time.

QUESTION: You’ve obviously had discussions with Bank of Canada officials over the last couple of weeks, and you’ve just indicated that you may be lowering your growth projections for the Canadian economy. I was wondering whether you could let us know or explain why your projections are so much lower for 2010 than the Bank of Canada’s numbers.

MR. KRAMER: In terms of our projections, that can probably be best explained with reference to the issue I mentioned before, which is that when we look at our projections for the United States we very much factor in financial conditions and the likely evolution of financial conditions over the near to medium term. And, again, research by the Fund and others have shown that when financial strains are significant, recovery tends to be slow, and we’ve factored that into our projections for the U.S. And, as I mentioned, that has some spillover effects onto Canada, the United States being a very important trading partner to Canada.

MR. ESTEVAO: Also, if I can just add, the Central Bank forecast was released a month or so ago, a couple months ago, and our view incorporates information that has occurred since that time. We don’t know what would be a new Bank of Canada forecast on the economy now, but the key difference, as Charlie mentioned, is our research and our outlook for the U.S.

MR. KRAMER: Yes, as we noted earlier, even our forecast will be changing from January. We’ve seen on the international front some very worrisome data coming out of the major countries.

QUESTIONER: When will you be providing the new numbers? When will the next set of numbers come out?

MR. KRAMER: Those will be released with our World Economic Outlook in April.

QUESTION: In your Point No. 9 for your concluding statement, you talk about the return to fiscal surplus, but you say: The considerable uncertainty surrounding the outlook would complicate setting numerical targets at present. Targets could be recalibrated when the outlook is clearer. Are you saying that they are being too ambitious in forecasting a return to surplus within a couple of years?

MR. KRAMER: No. What we’re saying is that fiscal credibility is strong in Canada. As I mentioned, it has a low net debt ratio. It has a strong track record of fiscal surpluses. While the objective to maintain a structural surplus and bring the debt ratio over time we think is the right one, we think it would be premature at this time to set specific numerical targets just because there’s a great deal of uncertainty about the outlook. Globally, obviously, there are downside risks to growth, downside risks to financial stability and trade. And so, at this point, we think it would be premature, given the considerable uncertainty that’s out there, to set very specific numerical targets, and we think those could be formulated once the outlook clarifies a bit.

QUESTION: They set out projections and they have specific numbers on what they expect the balance to be. Are those the numerical targets you’re talking about or are you talking about debt to GDP ratio or which numerical target?

MR. KRAMER: I’m referring to specific numerical targets to where the debt to GDP ratio would be at some point over the medium term. I’m not sure I understood your question.

MR. ESTEVAO: When we talk about numerical targets, we are not talking about the forecast that are in the budget. We are talking about having a normative target or signal some big policy change for the medium term now. That’s what we mean. We just mean now is the time to deal with the world crisis, not to set some normative targets for the medium term. After the crisis has passed, then Canada can go back to the good traditional policy framework that they have of setting numeric policy targets for the future.

MR. KRAMER: I just wanted to mention that the Board discussion for the Article IV is tentatively scheduled for the end of April, and we expect that the report would be released sometime not too long after that.


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