Transcript of a Teleconference Call on the International Monetary Fund's 2010 Article IV Review of Canada

December 23, 2010

With Charles Kramer, Mission Chief for Canada, and
Nicoletta Batini, Senior Economist in the North American Division, Western Hemisphere Department
Wednesday, December 22, 2010
Washington DC

MS. BECKMAN: Good morning. We are going to start the conference call now on Canada's Article IV PIN and staff report, which are embargoed until 10:00 a.m. Eastern. Charles Kramer, the Mission Chief for Canada, is with us, and Senior Economist Nicoletta Batini. Charles Kramer is going to give introductory remarks.

MR. KRAMER: Let me offer a quick overview of what's in the report. A couple of things I'd flag. One is we see Canada having weathered the global recession very well, in part, thanks to a big monetary and fiscal stimulus that's helped to support demand. Another factor we'd point to: unlike in a number of other countries, the financial system has avoided systemic pressures so that it's maintained the ability to provide credit through the recovery. The other we'd point to is that the economic recovery is moderating from where we saw in the first half of this year. There remain a number of risks on the horizon. Two factors that we've flagged in the report are high household debt levels, and on the external, risks particular to the U.S. economy. That said, we see macroeconomic policies as having the right tilt. Monetary policy tightening has paused and monetary conditions remain on the accommodative side, which we think is right given the slowdown in the economy and the risks. Fiscal policy also has smoothed. Some steps have been taken to support the recovery on that end.

Looking further ahead though, we see that fiscal policy has a very good plan to return to balance, which we support with a number of measures that will actually help to support growth like cuts in taxes and infrastructure spending that will strengthen the Canadian economy over time. More generally, in both monetary and fiscal policy, we see both of them having room to respond if the downside risks that we flagged do materialize.

On the financial end again the financial stability arrangements in Canada have continued to work very well and there again we think it's important to remain vigilant to any risks that could emerge, and after our discussions in Ottawa, in Toronto we have confidence that the authorities are very much on the same page with respect to that. With that we can turn to questions.

QUESTIONER: Good morning. I have a clarification that I'm asking about. In the part about fiscal policy having room to respond to downside risks should they materialize there is the mention of frontloading infrastructure spending and then bringing forward planned corporate tax cuts and I'm wondering if you could elaborate a little bit more on that bit about the corporate tax cuts and what exactly you are saying they could do in case the economy worsened there.

MR. KRAMER: There are plans to bring down corporate tax rates over time as part of the fiscal consolidation plan. What we're thinking there is that could be one option and there are a number of others, and obviously you mentioned infrastructure, that could be used to support the economy. But that's really only if we see downside risks materializing so that under the outlook we have now we don't think that would be necessary.

But more generally you mentioned fiscal room. What we mean by that is that Canada by comparison internationally has a very low net debt with a track record of fiscal soundness so that we see some room to respond there again only if the downside risks I've mentioned actually come to the fore.

QUESTIONER: To be clear, you're saying that corporate taxes could be done faster rather than --

MR. KRAMER: That's one option.

QUESTIONER: That's one option. Thank you.

QUESTIONER: Good morning. You say there is room for more stimulus if needed and you mentioned the risks to Canada's recovery, but when you mentioned the possibility of downside risks materializing, at what point would authorities have to step in and perhaps provide more stimulus?

MR. KRAMER: Let me talk a little bit about the outlook we have now. I should mention by the way we are going to be issuing a revised outlook not just for Canada but for all the countries in January with our World Economic Outlook which will come out in the latter part of January so that these forecasts may change a bit as we put together the new numbers not just for Canada but the U.S. and the other major countries.

Right now we're looking at 3-percent growth or thereabouts for this year and 2-1/4 for next year with growth at a pretty good clip. Again the expansion is maturing so that we'd expect some slowdown from the more rapid rates we saw particularly coming out of the crisis so that we don't see it as necessary to respond now. What we would need to see I think is a substantial deterioration in the outlook, for example, a down-leg in the U.S. expansion, but that's not something we're expecting now.

QUESTIONER: I wondered if I'm reading too much into it. The report says that the government has ample room to offer new stimulus and that the central bank also has room. Are you suggesting that fiscal policy from here on out should perhaps be taking the lead if any more stimulus is required?

MR. KRAMER: I think the kind of response you'd want to see would really depend on the scenario that materializes. One issue is that monetary policies generally and not just in Canada can respond pretty quickly, and in the bank's case as compared to some other countries, the overnight policy rate is above zero or above the effective zero, it's at 1 percent so that there is some room to loosen there. Again on fiscal policy we see fiscal policy is both credible and is backed up by a pretty low net debt ratio so that we see room to respond there as well.

QUESTIONER: You flagged the concerns about household debt and that's something that Canadian policymakers have been going on about for a bit now. I'm wondering, are you recommending further tightening of mortgage rules? Has it reached that stage yet?

MR KRAMER: I think at this point what we're seeing is again household debt has come up a lot relative to disposable income so that the figure we flag in the report is about 143 percent of disposable income and that's high. It's a little bit below where it's ranging in the U.S. In the U.S. it's about 149 percent of disposable income but still at a pretty high level. I think what I'd highlight there is the fact that again the Canadian financial system has continued to function quite well through the crisis so that we've seen consumer lending and household lending continuing to expand. It's decelerated a bit recently so that in the second half of the year we've seen that pace of expansion come down in part because the cycle is maturing and in part because of the good steps we think that have been taken to rein in credit a bit at a margin. I think at this point probably the appropriate thing to do is to wait and see how the credit cycle matures, but again I think one option would be to take more steps on the mortgage market or others to rein that in a bit more if it doesn't decelerate further to a level that's more sustainable.

QUESTIONER: I'm trying to get a sense of the overall tone of this report. Obviously globally things are pretty fragile right now in terms of the recovery. Can you overall give us an assessment of where you think the economy is headed compared to let's say 6 months ago?

MR.KRAMER: I'd say compared to six months ago and this is not just for Canada but I think globally, we see a mix of factors. One is that the expansion is maturing in a number of countries. We've seen the largest effects of fiscal and monetary stimulus globally probably coming down a little bit and overlaid on a maturing cycle. I think we've seen growth come down a little bit. At the same time we've seen risks increasing to some extent. But at the same time I think the issue we'd probably highlight is that the Canadian economy has really done pretty well through the expansion in no small measure thanks to support from the monetary and fiscal policy and the resilience of the financial system. Again what we're seeing is growth at a decent clip going forward. We've seen the labor markets performing pretty well so far so that employment has come back to its pre-crisis level. Going forward the issues we're focused on mostly are the risks to the outlook and policies being ready to respond if those risks materialize.

QUESTIONER: This isn't your report directly but it's so important to it. You cite risks to Canada's performance as being the performance of the United States economy and the performance of commodity prices. May I ask you to give us a bit of an outlook as to the fragility or otherwise of the United States economy first of all and then of Asian demand for commodities?

MR. KRAMER: Let me speak to the U.S. outlook a little bit. Today we received a revision of the latest quarterly growth figures and what I'd say there not just on the quarterly growth figures, stepping back from the revision but more generally and also on U.S. growth, we've seen a little bit more life in private demand there that we've probably been anticipating with a little bit more strength and resilience than we'd been expecting. But more generally is, and this is something we flagged in our reports on the U.S. and also in our World Economic Outlook publications, that it's a pretty subpar recovery in the United States by historical standards with still substantial headwinds from weaknesses on household balance sheets, for example, and risks in the housing market which seem to have stabilized but there are risks there from foreclosures and so forth. And obviously with the U.S. being Canada's biggest trading partner accounting for about 75 percent of trade, those sorts of ripples if they occurred in the U.S. economy would have important effects on Canada.

QUESTIONER: Commodity prices?

MR. KRAMER: Obviously recently we've seen commodity prices ranging higher with oil prices coming back close to a two-year high. One of the important ways that influences Canada is not just through trade, but the currency is what we call a commodity currency that tends to track movements in commodity prices so that we've seen the currency strengthen a little bit. But I think the overall thing we'd point to there is that higher commodity prices are good for the economy taking into account the concomitant strengthening of the currency.

QUESTIONER: You said that the risks to the Canadian financial system has increased because of household debt and U.S. exposure. We've had a couple of big acquisitions by Canadian banks of U.S. financial institutions and I'm wondering if that is of concern to you given this factor?

MR. KRAMER: I think what we're seeing there is that the Canadian financial system is coming from a position of strength so that they've come through the crisis with pretty strong balance sheets. They've maintained access to capital markets so that they've built on capital to a substantial level in part through issuing new equity. And they haven't needed the kind of systemic support that banks in other countries have required from the public sector so that they've stood strongly on their own. Now they're in a good position to make opportunistic acquisitions as banks normally do at this point in a financial cycle so that I think that's part of what we're seeing there recently.

QUESTIONER: Productivity is an issue that comes up a lot in Canada and I wondered if you could share your observations as to what exactly is causing Canada's productivity rates to lag behind the U.S. and some of its other major partners.

MS. BATINI: Productivity performance in Canada has been quite dismal I think in the past year. To be honest, I think everybody's view is that it's a bit of a head scratcher. To some extent there have measuring issues when compared to U.S. productivity performance to explain the way that we measure the unobservable that we call productivity. But on other grounds we've observed that for example relative to the U.S., Canada tends to employ more people per capita so that the good side tends to be Canadian firms tend to be less productive but employ more people and more labor force.

On the other hand, the macro response, the response of the government, has been really proactive and there is an array of productivity-enhancing measures that have been through to the economy both in the March budget of 2010 and the previous budgets. Remember that before the crisis occurred, Canada had already embarked on a very ambitious agenda of boosting productivity through the Building Canada Program which now overarches the stimulus so that Canada got a double stimulus during the crisis one which also included a tax advantage and many other advantages.

We keep conservative in our productivity assumptions for the World Economic Outlook for Canada but we wouldn't be surprised if all the investment that the government has made toward boosting productivity performance would actually pay out in the medium-run and I'm thinking more like 2015 to 2016.

MS. BECKMAN: I think that that would wrap it up for us then. Let me remind you that the contents of the call and the Staff Report are embargoed for another 10 minutes until 10:00 Eastern. Thank you.


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