Transcript

Transcript of a Press Briefing by Hamid Faruqee, Mission Chief to Canada, and Lusine Lusinyan, Senior Economist, International Monetary Fund

January 30, 2015

MS. BECKMAN: Hi, good morning, and thanks for joining the call. I’m going to turn it over to the Mission Chief for Canada, Hamid Faruqee, and Senior Economist, Lusine Lusinyan. Hamid is going to make some opening remarks, and then we are happy to take your questions.

MR. FARUQEE: Good morning, everyone. Thank you for joining us. Let me begin with highlighting some of the main messages from our staff report on Canada that we are releasing at 10:30 this morning.

Let me begin by saying that Canada experienced solid growth last year. We estimated growth around 2.4 percent in 2014. That came against a backdrop of a stronger U.S. recovery, although the rebalancing of the economy we were hoping for remains incomplete.

Now, of course, the big news is with substantially lower oil prices, growth is likely to slow. Lower oil prices may help with rebalancing in the economy but it will hurt growth.

Overall, what I would say in a nutshell is that we see the fall in oil prices as a challenge but also an opportunity for the Canadian economy going forward.

Let me start with the challenges and then I will talk about policies and end up with the opportunities.

In terms of the challenges, for 2015, we forecast growth to edge down slightly. You may have seen our January update that has our latest projections. We now see downside risks to those forecasts, given the further drop in oil prices since our forecasts closed, and given the recent data flow. You have seen the November GDP data released just today.

To summarize, I would see we see key downside risks to the economy at this stage mainly surrounding the effects of the unusually large oil price decline that we have seen, and there are only a handful of episodes where you see price declines of this magnitude, and the effects of the oil shock are still unfolding.

Lower investment in the energy sector is on the front line in terms of taking the hit. We have seen some confirmation of that in recent announcements from energy companies in terms of reduced capital spending and layoffs.

In terms of policies, on the fiscal side, IMF staff see a case for shifting the fiscal stance into neutral at the Federal level going forward, although at the provincial level, we see consolidation as still needing to continue, even the long term challenges in this space.

On monetary policy, the Bank of Canada’s recent rate cut was unexpected by markets but certainly understandable given the shock. We think it should provide some insurance against some of the downside risks that I mentioned.

It is also important to keep in mind that there are some important supports for the Canadian economy that are also in place. Notably, as I mentioned at the beginning, a stronger U.S. recovery, growth. There was a GDP release recently today as well.

We see growth for the U.S. economy at about 3.5 percent for 2015. That should provide important support, being Canada’s largest trading partner, and if anything, lower oil prices for the U.S. will be a benefit, a tax cut for consumers. The latest data on U.S. consumption also looks strong to us.

Those are important offsets to keep in mind. Also, the Canadian dollar has weakened. We think that will also provide some support outside of the energy sector. Of course, the interest rate itself should provide some support going forward.

In terms of the rebalancing of the economy, we think things are setting up for sectors outside of the energy area to benefit both lower energy input costs, stronger partner country growth, particularly the U.S., and a more competitive Canadian dollar.

Over the longer term, Canada will need to address lagging productivity issues. We talk about this in the report. You will find some details there. Particularly given the mixed performance in non-energy exports after the crisis, we think that is one of the priorities going forward to help rebalance the economy.

In terms of bottom line, we think a policy mix should aim towards promoting rebalancing with stronger growth, and we think there is still work to be done, but also strong policies in place and good frameworks in Canada, so we think on balance, the economy is doing relatively well, even though it has faced a major bump in the road.

Let me stop there and open it up to questions.

OPERATOR: We will take our first question.

QUESTIONER: Hi, there. Quick question on monetary policy. Would you undertake further rate cuts if the external environment keeps worsening, and if so, are you confident that the targeted macroprudential policies that you speak of will be enough to counter further imbalances in the housing market? Thank you.

MR. FARUQEE: Thanks for your question. On the issue of the rate cuts, certainly events are still unfolding. We are still digesting the data. If you look the weight that markets are placing on another rate cut, that certainly has moved up, for the first half of 2015, on the order of 40/50 percent probability.

From our standpoint here, what we would like to see, it will be data dependent. If we see signs of the weaker growth broadening to other sectors of the economy, particularly areas of investment outside the energy sector and consumption, we would be more concerned at that point and consider whether further policy action might be warranted at that stage.

With respect to macroprudential policies, we talked a lot about that in the report. We think measures the Canadian authorities have taken in the past have been effective, but there may have been some leakage particularly with the growth of uninsured mortgages. The housing market is strong. We see it in our estimates of over valuation.

At this point, I would say given the large shock that we have seen to oil and the uncertainties I mentioned surrounding that, we are more in a “wait and see” mode to see if there are some changes in housing market dynamics, and in the mortgage market, going forward.

We see some early signs there of some cooling, the sales and listing numbers for several key housing markets, Calgary, Edmonton, even Toronto, have moved. We are watching that very closely to see if housing starts to cool, given the large terms of trade shock that we have seen.

So I would say our advice is conditional on whether further macroprudential policy actions are required if we don’t see housing cooling down enough and seeing the risks going up, particularly given the income shock we have seen. There may be a case for further action, but I do not think we are there yet.

QUESTIONER: Thank you so much.

OPERATOR: There are no further questions at this time.

MS. BECKMAN: Is there anything in the report that you guys didn’t mention that you think is important to emphasize?

MR. FARUQEE: We talked a little bit about macroprudential policies. I think one of the things the report emphasizes is that Canada has done very well and its financial sector is very sound, but from the staff’s perspective, there are steps that the Canadian authorities could take to enhance the resilience of the financial sector.

We give some advice there that in terms of strengthening its institutional arrangements with crisis preparedness, macroprudential policies, we think that is important going forward.

Maybe on productivity, as I mentioned at the beginning, it’s an issue. Canada’s productivity has lagged the U.S. and other G7 economies. Going forward, we think there are things they could do.

MS. BECKMAN: Good. If there are no further questions, I think that will wrap up our conference call for today. The embargo on all the documents lifts at 10:30, so that is in five minutes. Thanks for dialing in.

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