## 1canea2024001

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### Growth, inflation, and labor market: recent developments and outlook
- Real GDP growth:
  - 3.8 percent in 2022; 1.2 percent in 2023.
  - Projected 1.3 percent in 2024 (annual).
  - Income per capita shrank by 1½ percent in 2023.
- Inflation:
  - Headline inflation: peak 8 percent in mid-2022; 2.9 percent in May 2024 (BoC target range 1–3 percent).
  - Core inflation measures: between 2.8 and 2.9 percent.
  - Shelter inflation: 6.4 percent y/y.
  - Projection: inflation returned to the 2 percent target by early 2025 in baseline.
- Labor market and immigration:
  - Net increase of more than 1 million temporary immigrants since end of pandemic.
  - Population growth: 3.2 percent in 2023 (highest since late 1950s).
  - Vacancy-unemployment ratio: peak 1.0 mid-2022 → 0.5 recently; vacancy-unemployment ratio 0.4 in June (noted elsewhere).
  - Unemployment rate: 6.2 percent (slightly above NAIRU estimated at 6 percent); expected to peak at 6.4 percent then normalize at 6 percent.
  - Youth unemployment: 11.7 percent.
  - Wage growth: in the 4–5 percent range; average hourly wage growth 5.4 percent y/y in June (from 5.1 percent in May).
  - Real wage increases exceeded productivity growth since mid-2023.
- Outlook:
  - Growth expected to pick up particularly in second half of 2024.
  - Negative output gap expected to close by early 2026 (alternate note: expected to close by end-2025 in a different section).
  - Consumption projected to grow 2.8 percent y/y in 2024.
  - Investment contraction expected to moderate substantially in 2024.
  - Wage growth expected to moderate further.
  - Immigration flows expected to soften substantially (temporary worker/student caps), despite higher 2024–26 targets for permanent skilled immigration.
  - Housing prices expected to rise moderately; shelter inflation and affordability to improve gradually as real rates decline.

### Monetary, fiscal, and financial sector developments and recommendations
- Monetary policy:
  - Bank of Canada began to normalize policy in June (first G7 central bank to start this process).
  - Ex-ante and ex-post real policy rates in the 1¼–2 percent range since mid-2023; neutral rate estimated around 0.75 percent.
  - Quantitative tightening: securities rolling off BoC balance sheet as they mature.
  - Policy guidance recommended:
    - Continue normalization as inflation declines; pace of rate reductions should be data dependent.
    - Continue quantitative tightening while monitoring market liquidity.
    - Communication enhancements suggested: (i) compare policy rates to neutral; (ii) comment on alignment of market expectations with BoC intentions; (iii) publish full rate path with caveats; provide quarterly paths for key variables and downloadable data appendices; reduce five-year lag in releasing internal staff forecasts.
- Fiscal stance and recommendations:
  - 2024 federal budget: about 1½ percent of GDP in new spending over five years; partially offset by ½ percent of GDP in revenue measures.
  - General government cyclically adjusted deficit widened from 0.2 to 0.6 percent of potential GDP in calendar 2023.
  - General government gross debt projected to decline from 107 percent of GDP at end-2023 to 95¼ percent of GDP by end-2029.
  - Staff view: fiscal policy should be tighter than baseline to support inflation objective and rebuild fiscal buffers; consolidation via revenue and spending measures while preserving space for housing- and climate-related spending.
  - Specific revenue recommendation: consider raising the GST rate and increase the GST credit to protect poor households.
  - Quantitative fiscal objectives: 2023 FES introduced an annual deficit ceiling of 1 percent of GDP starting 2026/27; staff recommend adopting a formal quantitative framework with long-term debt anchor, escape clause, and operational rule.
- Financial sector soundness and macroprudential measures:
  - “Big 6” banks account for 93 percent of system assets; highly capitalized and liquid.
  - Mortgage delinquency rates at 0.17 percent.
  - Arrears for auto and installment loans above pre-pandemic levels; business insolvencies increased.
  - OSFI measures: higher risk weights on certain variable rate / fixed payment mortgage loans; bank-by-bank ‘speed limit’ on origination of loans with loan-to-income ratio above 450 percent.
  - Nonbank financial institutions (NBFIs) represent two-thirds of the financial system; some have increased leverage and exposure to less liquid investments.
  - Data gaps for NBFIs only partially addressed since previous FSAP; staff recommend urgent addressing of data gaps and enhanced monitoring of NBFI liquidity.

### Housing, supply constraints, and policy recommendations
- Key facts and pressures:
  - Housing shortage estimated close to 4 million units (CMHC official estimate: more than 3.5 million units).
  - Household formation averaged about 250,000 per year; required annual building to meet new demand and address gap by 2040: 500,000 units annually.
  - Per capita housing stock: Canada 419 dwellings per 1000 inhabitants in 2020 (OECD average 485).
  - Rental vacancy rates around 1 percent; rent increases averaged 8 percent y/y in 2023.
  - Housing affordability worst since early 1990s.
- Policy measures and assessment:
  - Supply-side: reduce permitting times; rezone for higher density; mobilize unused government land; federal transfers conditioned on subnational efforts; increase federal resources for complementary infrastructure; address skilled trades shortages via targeted immigration; 2024 federal budget goal: build 3.9 million new homes by 2031.
  - Demand-side: caps on temporary worker/student visas; “flipping” taxes and levies on vacant units; extend federal ban on nonresidents’ purchases for two years (staff view: unlikely to be effective); tax credits for first-time homebuyers linked to newly built housing.
  - Additional recommendations: scale up Housing Accelerator Fund; prioritize targeted policies for families with children, students, and lower-income households; increase social housing (currently 4 percent of total housing); create a national forum convening federal/provincial/municipal governments, construction industry, and civil society.
- Risks:
  - Continued rapid immigration without faster housing supply response could sustain high shelter inflation and weigh on real incomes.
  - Measures that inadvertently boost demand should be avoided; consider replacing the ban on nonresident purchases with a nondiscriminatory tax on speculation.

### Immigration: macro effects and risks
- Empirical evidence cited: a 1 percentage point increase in the inflow of immigrants relative to total employment increases output by almost 1 percent by the fifth year in OECD countries (April 2020 WEO Chapter 4 evidence).
- Annex I findings:
  - Immigration can boost TFP, private capital formation, and working-age population growth.
  - For OECD 1980–2018, a 1 percentage point increase in immigrant flows to total employment increases output almost 1 percent by fifth year; about two-thirds from productivity, one-third from employment growth.
  - Distributional risks: immigration linked to higher housing prices and rents; entry-level wage disadvantages for some immigrants; adverse macro conditions can increase opposition to immigration.
- Policy note: recent visa caps for temporary migrants imply overall immigration flows expected to soften substantially despite planned increases in permanent skilled immigration.

### External sector assessment and policy implications
- 2023 external position assessed as moderately weaker than implied by fundamentals and desirable policies.
- Key 2023 figures (% GDP):
  - NIIP: 57.6
  - Gross Assets: 309.9
  - Debt Assets: 84.0
  - Gross Liab.: 252.3
  - Debt Liab.: 143.2
  - Current Account (CA): -0.7
  - Cyclically Adjusted CA: –1
  - EBA Norm: 2.3
  - EBA Gap: –3.3
  - Other Adj.: 1.5
- Drivers:
  - CA deficit widened by 0.3 percent of GDP in 2023 due to weakening terms of trade; terms of trade fell by 6 percent y/y.
  - Merchandise import volumes down 0.8 percent; merchandise export volumes up 4.5 percent.
  - REER weakened by 3.6 percent relative to 2022; staff assess REER overvalued by between 5.1 and 8.3 percent (midpoint 6.7 percent).
- Policy responses suggested:
  - Boost competitiveness in non-fuel goods and services exports: improve labor productivity; remove nontariff barriers; invest in R&D and physical capital; promote FDI.
  - Pursue industrial policies cautiously; tighter near-term fiscal policy and medium-term consolidation would support external rebalancing.
- Measurement biases:
  - Inflation compensation not recorded in income balance ⇒ downward bias 0.9 percent of GDP.
  - Retained earnings on portfolio equity not recorded ⇒ downward bias 0.6 percent of GDP.
  - Total estimated downward bias on income balance: 1.5 percent of GDP.

### Financial intermediation, NBFI linkages, and systemic risk
- Size and structure:
  - Total assets of banks and NBFIs: $14 trillion or 681 percent of GDP as of end-2022.
  - Stock market capitalization: $2.7 trillion (127 percent of GDP) at end-2022.
  - Banks’ market share in 2022: 36 percent (2002: 33 percent); OFIs increased from 37 to 42 percent (2002–2022).
- Bank exposures to NBFIs:
  - Exposure to pension funds: 3 percent of banks’ assets.
  - Exposure to ‘other OFIs’ (including hedge funds): 4 percent of banks’ assets.
  - These are the largest bank exposures to NBFIs across advanced economies (as stated).
- Asset mix and risks:
  - Pension funds increased exposure to illiquid assets (private equity); “Maple Eight” increased private equity share; real estate investments around 15 percent.
  - Risks: holdings of illiquid assets combined with repo financing and derivative hedging expose institutions to margin-call driven liquidity squeezes; leverage in some hedge funds (e.g., cash-futures basis trades) noted.
- Empirical stock-price analysis (abnormal-return correlations):
  - Typical banks–NBFIs abnormal return correlation ≈ 20 percent; rarely surpasses 40 percent in ordinary conditions.
  - Correlations spike in stress: up to 60 percent (oil shock and COVID outbreak); up to 80 percent (GFC).
  - Granger-causality tests show increased reciprocal influence during stress; evidence of increasing NBFI influence on banks during pandemic period, though sample limited.
- Policy implications:
  - Heightened monitoring of large NBFIs and liquidity risk; address data gaps; improve federal-provincial coordination and compulsory information provision where needed.

### Productivity, investment, AI, and structural reforms
- Productivity challenges:
  - Productivity in Canada among lowest in G7; investment low relative to peers, especially in ICT, R&D, and education.
  - Investment concentrated in mining and oil/gas extraction; Canada leads G7 in mining, oil/gas extraction, and transport investment shares.
- Firm-level evidence (30,000 firm-year obs. 2000–2024):
  - Corporate investment positively associated with productivity growth and valuation:
    - Labor productivity coefficient: 0.095** (0.037); No. of Obs.: 15,293.
    - TFP coefficient: 0.031*** (0.006); No. of Obs.: 11,079.
    - Tobin's q: 0.161* (0.091); No. of Obs.: 20,078.
- AI exposure:
  - Adoption indicators: 65 percent of Canadian organizations investing/POC using AI; 4 percent implemented AI (CGI 2023).
  - AI associated with higher TFP and corporate valuation; smaller aggregate labor productivity effect due to occupational structure.
  - Annex X Table 3: TFP coefficient 0.037** (0.019); Tobin’s q 4.857*** (1.853).
- Policy recommendations:
  - Increase investment in ICT, R&D, education; public investment for fundamental research; grants for start-ups and young firms; R&D tax incentives.
  - Address financial constraints and competition issues; reduce interprovincial trade barriers.
  - Design AI adoption strategies with regulatory guardrails and measures to limit adverse distributional effects.

### Childcare policy: macroeconomic benefits and scenarios
- Current federal target: reduce average regulated childcare fees to Can$10/day by 2026 (Quebec excluded).
- Model experiment (OLG gender model calibrated to Canada):
  - Assumes fees fall from Can$43/day to Can$10/day; abstracts from infrastructure/staff expansion costs.
  - Long-run effects:
    - Female LFP: increase by at least 5.5 percentage points; women with young children: +6.7 percentage points.
    - GDP: permanent 1.8 percent increase relative to no-program scenario.
    - Aggregate consumption: increases.
    - Male hours: −0.3 percent.
    - Average female wages: −1.3 percent (due to entry of less-educated women).
    - Childcare capacity needs: 100,200 additional children added to system (due to re-entry).
  - Combined scenario (childcare fees to Can$10/day + unexplained gender pay gap eliminated):
    - Female LFP increase: 8.4 percent.
    - GDP gains: 8.3 percent.
- Policy implications:
  - Fee reduction could generate substantial long-term gains; critical to invest in supply (infrastructure, training, retention of early childhood educators).
  - Without supply expansion, benefits may accrue mainly to families already using childcare.

### Climate mitigation and green transition
- Targets:
  - Reduce 2030 emissions by 40–45 percent relative to 2005; net zero by 2050.
  - Retail fuel charge set to rise to Can$170/ton by 2030.
- Carbon pricing:
  - Carbon pricing backbone of mitigation; previous analysis: carbon pricing alone would deliver about half of committed emissions reductions cost-effectively.
  - IMF-ENV model: carbon pricing could deliver decrease of 29 percent in emissions relative to BAU at cost between 0.2 and 1.2 percent of GDP (relative to CAD 65 baseline).
  - Increase to CAD 170 estimated to result in 17 percent reduction in emissions (alternative partial estimate); projected increase to Can$170 by 2030 decreases emissions by about 17 percent versus 2023 and 28 percent versus 2005 (other policies needed to reach 40–45 percent).
  - Burden on households estimated around 2 percent of consumption prior to revenue use (previous analysis); alternative estimate reported ~3.8 percent NPV of consumption in another study.
- Recommendations:
  - Maintain carbon pricing; complement with coordinated mitigation policies; enhance transparency on credit transfers and excess emissions charges.
  - Avoid replacing carbon pricing with technology subsidies (would be substantially more costly).
  - Consider independent public entity to advise on policy design and overall climate strategy.

### Financial stability, AML/CFT, and institutional coordination
- AML/CFT and beneficial ownership:
  - Federal beneficial ownership (BO) registry established in 2023 for federally incorporated companies; needs adequate human/technical resources to ensure data quality and false-declaration detection.
  - Provincial BO registries or measures (e.g., Quebec real-property BO registry) critical given most companies are provincially incorporated.
  - Strengthen BO transparency and AML/CFT risk-based supervision ahead of 2026 FATF mutual evaluation.
- Institutional coordination and FSAP follow-up:
  - Progress on many 2019 FSAP recommendations varied; federal-provincial fragmentation complicates data collection and systemic-risk analysis.
  - Several federal-provincial committees exist (HoA, SRSC, FISC, SAC, FMI-RC, CSA) to facilitate information sharing and coordination; staff recommend enhancing mechanisms to compel information provision and improve interagency coordination.
  - 2025 FSAP recommended for comprehensive evaluation and review of standards implementation and data gaps.
- Specific supervisory developments and implementation progress (selected):
  - AMF updates to Residential Hypothecary Lending Guideline (Feb 2024); OSFI ongoing B-20 consultations; data collection modernization initiatives underway (OSFI/BoC/DCM).
  - Limited progress on enhanced oversight and transparency for large public pension funds as of May 2024.

### Key risks and vulnerabilities
- Downside risks:
  - Abrupt global slowdown could dampen Canadian growth and inflation.
  - Stickier-than-expected inflation (shelter, wage growth, USD appreciation) could lead to tighter monetary policy, raising share of financially stretched households and companies, increasing delinquencies and bank losses, especially if significant house price correction occurs.
  - Elevated household indebtedness and pockets of stress in CRE and certain borrower cohorts could transmit to banks.
  - Increasing leverage and liquidity reliance in NBFIs and persistent data gaps could expose system to margin-call driven liquidity squeezes.
- Upside risks:
  - Strength in US economy could boost Canadian growth.
  - Continued labor market resilience could support stronger consumption and inflation.
  - Monetary normalization could raise housing prices and shelter inflation.

*Source: IMF staff report (Canada), Chapter 1: Growth.*

### 1. Growth  ________________________________________________________________________________________ 23

### 1. Growth

### Context
- Macroeconomic imbalances are well on their way to resolution.
- Inflation is now back within the Bank of Canada’s (BoC’s) target range—albeit well above the midpoint—and on a downward path.
- The economy slowed in 2023 without slipping into recession—supported by an historic post-pandemic surge in immigration, even as GDP per capita has shrunk.
- Labor markets have remained relatively robust, with immigration bolstering employment growth, while unemployment has so far risen only slightly above the natural rate.
- The BoC has recently begun to normalize monetary policy.

### Recent developments: growth, inflation, and labor market
- Real GDP growth:
  - Slowed from 3.8 percent in 2022 to 1.2 percent in 2023.
  - Annual growth for 2024 is projected slightly higher than in 2023 (1.3 percent versus 1.2 percent).
  - Income per capita shrank by 1½ percent in 2023.
- Inflation:
  - Annual headline inflation fell from a peak of 8 percent in mid-2022 to 2.9 percent in May 2024 (target range 1–3 percent).
  - Measures of core inflation range between 2.8 and 2.9 percent.
  - Shelter inflation remains high at 6.4 percent y/y.
- Labor market and immigration:
  - Net increase of more than 1 million temporary immigrants since the end of the pandemic.
  - Population growth spiked in 2023 to 3.2 percent, the highest rate since the late 1950s.
  - Vacancy-unemployment ratio fell from a mid-2022 peak of 1.0 to 0.5 recently.
  - Unemployment rate rose to 6.2 percent (slightly above the NAIRU, estimated at 6 percent).
  - Youth unemployment at 11.7 percent.
  - Wage growth remains strong—in the 4–5 percent range depending on the measure chosen; real wage increases have exceeded productivity growth since mid-2023.
  - To meter temporary immigration, authorities capped student and temporary worker visas; 2024–26 targets for permanent immigration of high-skilled workers were raised.

### Housing and external sector links to growth
- Housing:
  - Sharp increase in household formation pushed housing affordability to its worst level since the early 1990s.
  - Housing shortage estimated at close to 4 million units.
  - Rental vacancy rates around 1 percent; rent increases averaged 8 percent y/y in 2023.
  - Housing starts increased in 2023 but did not keep up with household formation.
  - The surge in immigration added to demand for scarce housing amid supply constraints.
- External sector:
  - Real effective exchange rate (REER) weakened by 3.6 percent relative to 2022.
  - Merchandise import volumes down 0.8 percent; merchandise export volumes up 4.5 percent.
  - Current account deficit widened by 0.3 percent of GDP in 2023 due to weakening terms of trade.
  - Net international investment position (NIIP) rose to 58 percent of GDP in 2023.
  - External position assessed as moderately weaker than implied by medium-term fundamentals and desirable policies.

### Monetary, fiscal, and financial developments affecting growth
- Monetary policy:
  - BoC began to normalize policy in June (first G7 central bank to start this process).
  - Ex-ante (and ex-post) real policy rates in the 1¼–2 percent range since mid-2023, above the neutral rate estimated at around 0.75 percent.
  - Quantitative tightening proceeded with securities rolling off the BoC balance sheet as they mature.
- Fiscal stance:
  - General government cyclically adjusted deficit widened from 0.2 to 0.6 percent of potential GDP in calendar 2023.
  - General government gross debt remains relatively moderate compared to other G7 countries.
- Financial sector:
  - “Big 6” banks account for 93 percent of system assets and are highly capitalized and liquid.
  - Mortgage delinquency rates at 0.17 percent.
  - Arrears for auto and installment loans have risen above pre-pandemic levels; business insolvencies have increased.
  - OSFI measures include higher risk weights on certain variable rate / fixed payment mortgage loans and a bank-by-bank ‘speed limit’ on origination of loans with loan-to-income ratio above 450 percent.
  - Nonbank financial institutions represent two-thirds of the financial system; some have increased leverage and exposure to less liquid investments.
  - Data gaps for NBFIs observed in the previous FSAP have been only partially addressed.

### Outlook and baseline projections
- Growth and output gap:
  - Growth expected to pick up particularly in the second half of 2024.
  - Negative output gap expected to close by early 2026.
- Consumption and investment:
  - Consumption projected to grow by 2.8 percent year-on-year in 2024.
  - Contraction in investment expected to moderate substantially in 2024.
- Labor market and unemployment:
  - Unemployment expected to continue rising slowly, peaking at 6.4 percent toward the middle of the year before normalizing at the estimated NAIRU of 6 percent.
  - Wage growth expected to moderate further.
- Immigration:
  - Recent steps to restrict temporary foreign workers and students imply overall immigration flows are expected to soften substantially, notwithstanding planned increase in permanent, skilled immigration.
- Inflation and housing:
  - Inflation projected to return to the 2 percent target by early 2025.
  - Housing prices expected to rise moderately; shelter inflation and housing affordability projected to improve gradually as real interest rates decline.
- External and banking outlook:
  - Current account expected to remain in slight deficit over the medium term.
  - Banking sector expected to remain resilient as gradually falling real interest rates ease debt service pressures.
  - Nonbank sector expected to remain healthy overall, with monitoring warranted due to signs of increasing leverage in some large institutions.

### Key risks and vulnerabilities relevant to growth
- Housing affordability and supply bottlenecks could sustain high shelter inflation and weigh on real incomes.
- Continued rapid immigration without faster housing supply response could amplify affordability pressures.
- Elevated household indebtedness and pockets of stress in CRE and certain borrower cohorts could transmit to banks if interest rates or credit conditions shift unexpectedly.
- Increasing leverage and liquidity reliance in NBFIs could expose the system to margin-call driven liquidity squeezes, amplified by persistent data gaps.

*Source: IMF staff report (Canada), Chapter 1: Growth.*

### 14.      The fiscal stance is expected to ease again in calendar 2024 but normalize over the

### 1canea2024001 - 14.      The fiscal stance is expected to ease again in calendar 2024 but normalize over the

### Fiscal outlook and projections
- The 2024 federal budget introduced about 1½ percent of GDP in new spending measures over a five-year period to address the housing crisis, support vulnerable groups, and boost productivity, partially offset by ½ percent of GDP in capital-gains and other revenue measures.
- The federal fiscal consolidation path is projected to be somewhat more gradual while still meeting the quantitative objectives laid out in the 2023 Fall Economic Statement (FES).
- General government debt is projected to decline from 107 percent of GDP at end-2023 to 95¼ percent of GDP by end-2029, with the decline slightly smaller than previously forecasted due to the fiscal easing.

### Macroeconomic effects of immigration (excerpted evidence)
- Evidence cited: a 1 percentage point increase in the inflow of immigrants relative to total employment increases output by almost 1 percent by the fifth year in OECD countries.

### Risks to the macroeconomic outlook
- Downside risks:
  - An abrupt global slowdown could dampen Canadian growth and inflation alike.
  - Tighter monetary policy, possibly from stickier-than-expected inflation (reflecting shelter costs, wage growth, or continued USD strengthening against the CAD), could raise the share of financially stretched households and companies, especially with many pandemic-era mortgages repricing.
  - For households, this could initially reduce consumption; a material rise in unemployment could increase household loan delinquencies and generate sizable bank losses and weakened capitalization, particularly if a significant house price correction materializes.
- Upside risks:
  - Strength in the US economy could deliver higher-than-expected growth in Canada.
  - Continued labor market resilience could support stronger-than-expected consumption and inflation.
  - Normalization of monetary policy could boost housing prices and shelter inflation.

### Authorities’ views
- Broad agreement on the outlook: economy avoided the predicted recession and inflation fell back within the Bank of Canada’s target range.
- Authorities expect economic growth to continue and noted positive impact from the Trans Mountain pipeline expansion.
- They viewed recent federal fiscal policy announcements as not creating meaningful new inflationary pressure given a relatively low and declining deficit.
- Authorities agreed risks were broadly balanced.
- On communications, authorities noted important steps (press conferences after every scheduled interest rate announcement, scenario analysis in Monetary Policy Reports) and were skeptical about saying more on policy rate intentions.
- On fiscal policy, authorities emphasized a history of responsible policies, fastest pace of fiscal consolidation since the pandemic, lowest deficits among the G7, and that increases in the GST were not under consideration.
- They supported the new quantitative fiscal objectives and preferred simpler targets over cyclically-adjusted deficit targets.

### Policy discussions — Normalizing and strengthening macroeconomic policies
- Monetary policy:
  - Normalization should continue as inflation declines.
  - It was appropriate for the BoC to begin lowering its policy rate in June; future calibration should consider incoming data and the Federal Reserve’s rate decisions.
  - Risks include potential weaker monetary policy transmission since the pandemic and the need to monitor shelter inflation dynamics and wage growth.
  - The monetary policy stance is expected to continue to be restrictive for a while; nominal rate cuts with declining inflation would keep real rates well above neutral.
  - Quantitative tightening should continue, with the BoC carefully monitoring market liquidity as its balance sheet shrinks.
- Monetary policy communication enhancements suggested:
  - (i) comparing policy rates to neutral;
  - (ii) commenting on whether market expectations are aligned with BoC intentions;
  - (iii) publishing the rate path in its entirety (with clear caveats that it is a best forecast, not a commitment).
  - Other enhancements: providing quarterly paths for key variables, including downloadable data appendices in the Monetary Policy Report, and reducing the five-year lag in releasing internal staff forecasts.
- Fiscal policy:
  - Fiscal policy should be tighter than projected in the baseline to support the BoC’s efforts to return inflation to target and to rebuild fiscal buffers.
  - Fiscal consolidation would provide room for future downturns and to finance priority investments (healthcare including pharmacare, education, defense, the green transition) while ensuring debt sustainability.
  - Consolidation could be supported by a combination of revenue and spending measures while preserving space for housing- and climate-related spending needs.

### Specific fiscal policy recommendations
- Revenue-side:
  - Canada’s revenue-to-GDP ratio is generally in line with OECD benchmarks but below the G7 average, particularly in Goods and Services Tax (GST) collection.
  - The government could consider raising the GST rate (cut in 2008) and increasing the GST credit to protect poor households.
  - The increase in the capital gains inclusion rate in the 2024 budget improves tax neutrality across capital income forms and is likely to have no significant impact on investment or productivity growth.
- Spending-side:
  - Identify spending measures via ongoing spending and strategic policy reviews.
  - The relatively large share of public employment and corresponding wage bill suggests scope to streamline public services and improve efficiency.
  - Coordinate federal consolidation with complementary provincial efforts to boost revenues and cut spending.
- Fiscal institutions and frameworks:
  - Introduction of quantitative fiscal objectives was welcome; adopt a formal quantitative framework to anchor fiscal policy more effectively.
  - The 2023 FES introduced additional quantitative objectives, including an annual deficit ceiling of 1 percent of GDP, starting in 2026/27.
  - A public consultation leading up to adoption of a formal fiscal framework would be helpful, including to improve coordination at the subnational level.
  - Suggested framework elements: a long-term quantitative debt anchor calibrated using a risk-based fiscal framework, an escape clause for shocks, and an operational rule guiding return to the anchor after shocks.

### Housing policy: measures and assessment
- Supply-side measures:
  - Federal, provincial, and municipal efforts to reduce permitting times, rezone for higher density, mobilize unused government land; federal transfers conditioned on these efforts.
  - Increasing federal resources for complementary infrastructure.
  - Addressing skilled trades shortages through targeted immigration policy.
  - The 2024 federal budget goal: building 3.9 million new homes by 2031; if achieved, would largely eliminate the housing supply gap CMHC estimates must be filled to bring affordability back to 2003 levels.
- Demand-side measures:
  - Restrictions on visas for temporary foreign workers and foreign students.
  - “Flipping” taxes and levies on vacant units to deter speculators.
  - Extension of the federal ban on nonresidents’ purchases of housing for another two years (noted as unlikely to be effective given limited role of foreign investors in Canadian real estate).
  - Tax credits for first-time homebuyers linked to newly built housing to avoid merely boosting demand and home prices.
- Additional recommendations:
  - Scale up the Housing Accelerator Fund further.
  - Place greater priority on targeted policies for families with children, students, and lower-income households.
  - Increase the stock of social housing (currently accounts for just 4 percent of total housing).
  - Consider creating a forum for federal, provincial, municipal governments, construction industry, and civil society to facilitate housing policy decisions.

### Macro policy contingency guidance
- If inflation is stickier than expected, monetary easing might need to be delayed and fiscal policy tightened.
- Positive external shocks (stronger US growth or favorable terms of trade) would warrant tighter policy settings.
- Lower global demand and increased geo-fragmentation could damp growth and require more supportive fiscal policy, while monetary policy should act cautiously if supply-side shocks raise inflation.
- If a scenario combines higher inflation or adverse shocks with a significant contraction in credit, consider loosening macroprudential policies (e.g., reducing the domestic stability buffer applied to large banks) to support credit growth and prevent adverse feedback loops.

### Safeguarding financial stability
- Monitor liquidity of the largest institutional investors closely and frequently to intercept signals of deteriorating funding capacity and assess spillover risks (e.g., large margin calls leading to forced sales).
- Improve coordination across regulatory and supervisory authorities at federal and provincial levels to enhance timeliness of data collection for systemic risk analysis and real-time threat assessment.
- Staff analysis indicates bank-NBFI linkages have grown over time (see Annex VIII), highlighting importance of addressing NBFI data gaps to prepare for spillovers into the banking sector.
- Continue to enhance understanding of money laundering (ML) risks, particularly cross-border risks, by leveraging cross-border payments data in AML/CFT supervisory risk assessments and onsite engagement.
- Strengthen cooperation and information sharing between AML/CFT and prudential supervisors and financial stability experts to identify ML vulnerabilities that may affect financial sector stability.

### Institutional and coordination challenges
- Progress on some 2019 FSAP recommendations has been limited, with federal structure complicating efforts to address data gaps related to cross-sectoral exposures, nonbank financial intermediation, and funding market activities.
- Several federal-provincial coordination mechanisms exist and initiatives are in place to reduce regulatory fragmentation and bridge data gaps, but voluntary nature of initiatives has limited progress.
- Given the size of Canada’s financial sector and importance of non-bank financial intermediation, higher priority should be placed on mechanisms to compel information provision.
- The 2025 FSAP is an opportunity for comprehensive evaluation of financial stability risks and review of global standards implementation, interagency coordination, and data gaps.
- Authorities should continue efforts to strengthen oversight and disclosure for large public pension funds (limited progress to date).

### Coordination mechanisms (summary of Table 1)
- Multiple committees facilitate information sharing, systemic risk monitoring, supervisory consultation, senior advisory discussion, FMI resolution coordination, and harmonization of capital markets regulation.
- Notable committee roles:
  - Committee Heads of Regulatory Agencies (HoA): share information on emerging regulatory issues, financial system trends, and broad market developments.
  - Systemic Risk Surveillance Committee (SRSC): facilitates information sharing to monitor and assess systemic risk and identify vulnerabilities.
  - Financial Institutions Supervisory Committee (FISC): consultation and exchange of information on supervision of federal financial institutions.
  - Senior Advisory Committee (SAC): forum for financial sector policy issues, including financial stability and systemic vulnerabilities.
  - FMI Resolution Committee (FMI-RC): federal-level consultation on resolution of Canadian financial market infrastructures.
  - Canadian Securities Administrators (CSA): improve, coordinate, and harmonize regulation of the Canadian capital markets.
- Institutional participants (selected): Finance Canada; Bank of Canada; OSFI; CDIC; FCAC; CMHC; provincial securities and financial regulators (AMF, ASC, BCFSA, BCSC, OSC, FSRA); other agencies. Roles and chairs vary by committee.

*INTERNATIONAL MONETARY FUND*

### 30.      The establishment of the federal beneficial ownership (BO) registry in 2023 for all

### 30.      The establishment of the federal beneficial ownership (BO) registry in 2023 for all

### Beneficial ownership (BO) transparency and AML/CFT
- The establishment of the federal BO registry in 2023 for all companies incorporated at the federal level in Canada was a welcome step in the fight against money laundering.
- Implementation needs:
  - Support the launch with adequate human and technical resources to ensure data quality and the ability to detect (and pursue) false declarations at the national level.
  - Given most Canadian companies are incorporated at the provincial level, establishment of provincial BO registries (as in Quebec) or other provincial BO transparency measures is critical to avoid arbitrage concerns.
  - Consider implementing sectoral BO transparency initiatives like the real-property BO registry in British Columbia in other high-risk real estate markets to limit the exposure of real estate to financial crimes.
- Strengthening BO transparency and AML/CFT risk-based supervision can strengthen efforts to tackle laundering of proceeds of foreign corruption.

### Transnational corruption, foreign bribery, and enforcement gaps
- Canada continues to implement measures to address transnational aspects of corruption, but some areas require further improvement.
- The OECD Working Group on Bribery (WGB) in Canada’s Phase 4 evaluation in 2023:
  - Welcomed enhancements of the legal framework to fight foreign bribery.
  - Expressed concerns over the low enforcement levels since the Corruption of Foreign Public Officials Act entered into force in 1999.
- Recommended further actions for authorities:
  - Continue to proactively enforce foreign bribery legislation.
  - Maintain comprehensive statistics.
  - Align the regime for liability of legal persons and whistleblower protection with OECD standards.
- Contextual facts from the source:
  - Out of the 500 largest multinational enterprises in the world, 21 are headquartered in Canada, with some operating in high-risk sectors (e.g., manufacturing, energy, and mining).
  - Canada is also a leading source of outward FDI.

### Authorities’ views on financial-sector resilience and AML/CFT priorities
- Broad agreement about resilience of the financial sector.
- Liquidity monitoring of NBFIs is done on a voluntary and cooperative basis; authorities felt this approach allowed them to obtain needed information for effective oversight.
- Federal-provincial cooperation is continuing to improve, with vehicles such as the Systemic Risk Surveillance Committee enabling supervisory agencies to exchange information and coordinate.
- Authorities agreed that focusing further on:
  - Cross-border financial flows.
  - Beneficial-ownership transparency.
  would strengthen the effectiveness of the AML/CFT framework ahead of the 2026 FATF mutual evaluation.

### Productivity, immigration, and labor-force participation (structural challenges)
- Boosting labor and total factor productivity is the highest priority to ensure rising living standards; productivity in Canada is among the lowest in the G7.
- Contributing factors and policy directions:
  - Low level of investment overall relative to peers and particularly low investment in ICT, R&D, and education.
  - Introduce incentives to increase investment in ICT, R&D, and education.
  - Harness artificial intelligence (AI) within appropriate guardrails to manage risks.
  - Address barriers to firm growth, financing constraints, limited competition, and high interprovincial trade barriers.
- Immigration:
  - Will remain critical given Canada’s aging population.
  - Skills mismatch has led to shortages in healthcare and skilled trades.
  - Need to reduce hurdles for immigrants to have qualifications recognized.
- Female labor force participation (LFP):
  - Further improving female LFP can raise GDP and productivity.
  - Female LFP is strong internationally but still lower than male LFP; gaps increase with worker age and are particularly large for workers in their 30s and among less educated workers—suggesting childcare access issues.
  - Staff model-based analysis suggests that—in the absence of supply constraints—reducing the costs of childcare could boost female LFP by some 5.5 percentage points over the longer term.

### Childcare policy implementation and supply constraints
- Canada’s national affordable childcare program has potential but early in rollout; observed female LFP increase during initial two years may not be attributable solely to the program.
- Supply-side constraints:
  - Too few early childhood educators and too few physical facilities.
  - Authorities’ intention: add 250,000 childcare spaces to the more than 750,000 affordable spaces already available.
- Policy implications:
  - Without expanded supply, subsidizing demand may deliver windfalls to families already using childcare rather than broadening access and boosting LFP.
  - Additional policies beyond affordable childcare needed to boost female LFP and close wage gaps.

### Climate mitigation, carbon pricing, and green transition
- Canada’s commitments:
  - Reduce 2030 emissions by 40–45 percent relative to 2005 levels.
  - Achieve net zero emissions by 2050.
- Carbon pricing:
  - Is the backbone of the effort; pre-determined increase in carbon prices until 2030 provides a solid market signal.
  - Retail fuel charge is set to rise to Can$170/ton by 2030.
  - Carbon tax revenues are rebated to households.
  - Analysis in the 2023 Article IV Consultation suggested carbon pricing alone would deliver about half of committed emissions reductions in a cost-effective way.
  - Replacing the retail fuel charge with technology subsidies would imply substantially higher costs of achieving climate goals.
  - Eliminating carbon pricing faced by Canadian exporters could expose firms to carbon border adjustment policies of trading partners and shift fiscal revenues overseas.
- Implementation gap and supplementary measures:
  - Current and proposed policies, if fully implemented, should allow Canada to achieve between 80 and 85 percent of its climate mitigation target by 2030; closing the “implementation gap” will require supplementary effort.
  - Need enhanced transparency (e.g., on transfers of carbon credits between large emitters and excess emissions charge payments) and better communication to link rebates to carbon-related charges.
- Policy coordination and review:
  - More than 240 provincial climate change mitigation policies implemented as of mid-2023 and around 80 more announced or in process of being implemented.
  - A holistic review should assess each measure’s contribution to decarbonization, cost-effectiveness, distributional effects, and impact on international trade.
  - Improved inter-agency coordination could include establishing an independent public entity to advise government and parliament on policy design and overall climate mitigation and adaptation strategy.

### Green industrial policy and subsidies
- Canada has laid out pieces of a comprehensive green-transition strategy (2023 budget blueprint, interim sustainable jobs plan, critical mineral strategy, technology-neutral incentives, strategic call on electric-vehicle battery manufacturing).
- After the US Inflation Reduction Act (IRA), Canada implemented subsidies and negotiated bespoke incentive packages for electric vehicle battery manufacturers; the authorities note they have not introduced “buy Canadian” provisions and are moving toward investment tax credits accessible by all.
- Guidance on subsidies:
  - Subsidies should be well-targeted to address identified market failures, time-bound, cost-effective, transparent, and designed in a WTO-consistent manner.
  - Avoid green industrial policies that lead to a “race to the bottom,” global fragmentation, or an unlevel playing field.

### Staff appraisal: macro and policy priorities
- Near-term macro outlook:
  - Canadian economy appears to have achieved a soft landing.
  - Inflation is declining steadily, a recession has been avoided, and growth supported by surging immigration even as per capita income has shrunk.
  - Housing affordability has reached its worst levels in a generation; supply unable to keep up with immigration-fueled demand.
  - Economic activity expected to pick up in the second half of this year as monetary policy continues to normalize; risks around outlook more balanced.
  - External position remains moderately weaker than level implied by medium-term fundamentals and desirable policies.
- Monetary policy:
  - The BoC has appropriately started normalizing monetary policy; stance will need to remain restrictive to bring inflation to target.
  - Pace of further rate reductions should be data dependent to ensure inflation returns to the 2-percent target by early 2025.
  - Continued enhancements in monetary policy communication recommended to provide further information about likely evolution of policy rates.
- Fiscal policy:
  - Fiscal policy has remained prudent; some tightening could help improve policy mix consistency and rebuild fiscal space.
  - Canada’s deficits and debt levels are lower than in most peers; further consolidation will help support inflation goals and rebuild fiscal buffers.
  - Introduction of quantitative fiscal objectives is a major step forward; could be followed by a public consultation leading to adoption of a formal fiscal framework and improved coordination with provincial governments.
- Housing:
  - Policies to address housing affordability should deliver results over time, but further efforts likely required.
  - Federal, provincial, and municipal measures to promote housing supply are recent and will need time.
  - Given size of housing gap, all levels of government likely need to make further efforts, including social housing.
  - Measures that inadvertently boost demand should be avoided; the ban on nonresident housing purchases would better be replaced by a nondiscriminatory tax on speculation.
  - Consider creating a national forum to address housing issues involving all stakeholders.
- Financial sector oversight:
  - Financial sector remains resilient; banks well capitalized and liquid.
  - Nonbank financial institutions appear healthy but increased leverage and share of illiquid investments in some large players require heightened monitoring.
  - Data gaps persist and should be addressed urgently, including by strengthening federal-provincial coordination.
- Structural growth priorities:
  - Boost productivity growth, encourage investment and more R&D, harness AI within guardrails, reduce interprovincial trade barriers, and continue integration of immigrants.
  - Affordable childcare program can boost labor-force participation of young mothers if supply expansion plans are successful.
- Climate policy priorities reiterated:
  - Continue policies to reduce greenhouse gas emissions and support green transition.
  - Carbon pricing is the linchpin; replacing it with technology subsidies would make emission-abatement goals much more costly.
  - Complement carbon pricing with coordinated mitigation policies; consider creating a single body to conduct research and advise government on climate change issues.
  - Avoid green industrial policies that cause “race to the bottom,” global fragmentation, or create an unlevel playing field.

*Source: IMF staff report excerpts.*

### 50.      Staff recommend that the next Article IV consultation be held on the standard 12-

### 1canea2024001 - 50.      Staff recommend that the next Article IV consultation be held on the standard 12-

### Growth, Output, and Investment
- Real GDP growth has been relatively strong in international comparison; this pattern persists in the most recent data.
- Investment has been quite weak until recently.
- The output gap is slightly negative and is expected to close by end-2025.
- Per capita growth has been negative, and more sharply so than in peers.
- Private consumption has rebounded.

### Inflation and Expectations
- Inflation slowed sharply in 2023, with most categories, except shelter, showing improvement.
- The inflation slowdown began earlier than in other countries but lost some steam in the second half of 2023.
- Alternate measures of core inflation are all showing improvement.
- Looking ahead, inflation is expected to return to target by early 2025.
- Core inflation might take longer to fall given pressures on shelter costs, but it still looks favorable in international comparison.
- Consumers’ near-term inflation expectations have improved only sluggishly, while businesses’ expectations have normalized more appreciably.

### Immigration and Population
- The stock of international migrants exceeded 280 million, or about 3.5 percent of the world population (UN estimates, 2020), and almost three-quarters of these were of working age.
- Most international migrants reside in Asia and Europe (31 percent each), followed by North America (21 percent).
- In Canada, according to the 2021 Census, the number of immigrants reached 8.4 million, about 23 percent of the population, and an additional 1.3 million people were born of an immigrant parent.
- Immigration has spiked, especially of temporary workers and students.
- Canada’s program to attract skilled permanent residents has grown as well, but more modestly.
- Population growth is at its highest since the late 1950s.
- Newer immigrants usually take some time to get jobs, and this has contributed to the aggregate unemployment rate.

### Labor Market and Wages
- The labor market is softening, with vacancies declining and unemployment rising modestly, partly reflecting new immigrants.
- Wage growth nonetheless remains quite rapid and far in excess of productivity growth, implying rising ULCs (unit labor costs).
- Female labor force participation is strong in international comparison, with a notable gap for workers in their 30s, hinting at a possible lack of access to childcare.

### Housing and Affordability
- House prices skyrocketed during the pandemic and corrected only partially.
- Mortgage rates, despite some slight easing, remain very high.
- Housing affordability has reached its worst level since the early 1990s, with some easing recently.
- The affordability challenge is particularly acute for lower-income households.
- One major contributor to recent pressures was the extent to which household formation exceeded housing completions.

### Monetary Policy and Financial Conditions
- The Bank of Canada (BoC) had tightened monetary policy decisively before its most recent easing, making this the most aggressive tightening cycle in decades.
- While the ex post real rate is lower than in the US, given lower inflation, it is nonetheless well above neutral.
- Quantitative tightening is proceeding in a passive manner.
- Borrowing costs are easing slightly.
- Many pandemic-era low-interest-rate mortgages are expected to reset in the near term.
- Household indebtedness has risen.

### Fiscal Policy and Public Finances
- Fiscal policy has become slightly expansionary, driven by a loosening across components of the general government.
- Gross debt remains relatively low in international comparison.
- While taxes are not low compared to other countries, there are several possibilities for revenue-raising measures.
- The government wage bill is relatively high, and, to a lesser extent, so is the share of public employment.

### Financial Sector Soundness (Table 7, 2020–23; Billions of Canadian dollars where indicated)
- Total assets 1/: 6,971 (2020), 7,267 (2021), 8,097 (2022), 8,536 (2023).
- Percent of GDP (Total assets): 314.0 (2020), 288.7 (2021), 287.8 (2022), 295.1 (2023).
- Capital Adequacy:
  - Total capital ratio: 16.1 (2020), 17.1 (2021), 17.3 (2022), 17.1 (2023).
  - Tier 1 ratio: 13.9 (2020), 15.1 (2021), 15.3 (2022), 15.2 (2023).
  - Capital to assets: 4.6 (2020), 4.8 (2021), 4.9 (2022), 4.7 (2023).
- Credit Risk:
  - NPLs net of provisions to capital: 4.2 (2020), 2.9 (2021), 2.6 (2022), 3.8 (2023).
  - NPLs to Gross Loans: 0.5 (2020), 0.4 (2021), 0.3 (2022), 0.5 (2023).
- Profitability:
  - Return on assets: 0.8 (2020), 1.1 (2021), 1.2 (2022), 0.8 (2023).
  - Return on equity: 13.2 (2020), 17.3 (2021), 18.2 (2022), 12.0 (2023).
  - Interest margin on gross income: 56.4 (2020), 54.0 (2021), 54.2 (2022), 56.6 (2023).
  - Trading income to gross income: 4.2 (2020), 3.4 (2021), 6.3 (2022), 5.7 (2023).
  - Non-interest expenses to gross income: 56.1 (2020), 56.6 (2021), 53.6 (2022), 62.2 (2023).
- Liquidity:
  - Liquid assets to total assets: 15.4 (2020), 15.1 (2021), 13.4 (2022), 12.1 (2023).
  - Liquid assets to short-term liabilities: 78.0 (2020), 79.5 (2021), 58.5 (2022), 49.2 (2023).
  - Customer deposits to loans: 109.5 (2020), 113.1 (2021), 109.5 (2022), 107.0 (2023).
- Real estate exposure:
  - Residential real estate loans to total loans: 34.5 (2020), 36.4 (2021), 35.0 (2022), 35.0 (2023).
  - Commercial real estate loans to total loans: 3.4 (2020), 3.4 (2021), 3.2 (2022), 3.2 (2023).
- FX and Derivative Risk:
  - FX Assets to Total Assets: 43.9 (2020), 50.6 (2021), 52.5 (2022), 0.0 (2023).
  - FX loans to total loans: 37.8 (2020), 35.8 (2021), 38.9 (2022), 39.6 (2023).
  - FX liabilities to total liabilities: 52.9 (2020), 42.9 (2021), 58.8 (2022), 65.9 (2023).

### Annex I — The Economic Impact of Immigration: Key Findings
- The stock of international migrants global context and Canada-specific numbers (see Immigration and Population section above).
- Immigration can affect growth drivers: TFP, private capital formation, and working-age population growth.
- Empirical literature typically finds immigration supports economic growth and higher productivity:
  - For OECD countries 1980–2018, the April 2020 WEO Chapter 4 finds a 1 percentage point increase in the ratio of immigrant flows to total employment can increase output by almost 1 percent by the fifth year; about two-thirds of the increase is attributed to an increase in labor productivity and one-third to employment growth.
  - Several studies (Peri 2011; Ortega and Peri 2014; Alesina, Harnoss, and Rapoport 2015; Jaumotte, Koloskova, and Saxena 2016; October 2016 WEO Chapter 4; Li 2021; Beerli and others 2021) find positive effects of immigration on TFP.
- Immigration can directly boost innovation (Burchardi and others 2021; Beerli and others 2021) and entrepreneurship (Fairlie and Lofstrom 2015).
- Findings on capital accumulation are mixed (Fourlanetto and Robstad 2019 found negative impact in Norway for Q1:2009–Q2:2014 due to decline in capital intensity, though also observed lower unemployment and small positive effects on prices and public finances).
- Canada-specific literature is mixed:
  - Dugan, Fang, and Gunderson (2013) find positive impacts on GDP, GDP per capita, productivity, investment, and net government balances, without impact on unemployment.
  - Blit, Skuterud, and Zhang (2020) find limited impact of STEM-educated immigrants on innovation, possibly due to lower employment rate in STEM jobs among those immigrants.
- On employment and distribution:
  - Most literature finds little impact of migration on real wages of native workers (Kiguchi and Mountford 2013) even with large waves of immigration (Engler and others 2023).
  - If immigrants are perfect substitutes or less skilled than natives, immigration can reduce per capita income (Borjas 2019).
  - For France (1994–2008), D’Albis and Boubtane (2016) find immigration increased GDP per capita and reduced unemployment; a 1 percent shock in immigration increased per capita GDP by 0.4 percent within a year, with family-based immigration having larger effects.
  - Hunt (2012) suggests family-based immigration can increase the probability of natives completing 12 years of education.
- Distributional and social-cohesion risks:
  - Immigrants may face entry-level wage disadvantages (Kaushal and Lu 2018).
  - Immigration has been associated with higher housing prices and rents (Mussa, Nwaogu, and Pozo 2017), potentially undermining social support for immigration.
  - Adverse macroeconomic conditions can increase opposition to immigration (Ruist 2016); reduced social cohesion can lower support for public goods (Alesina, Baqir, and Easterly 1999; Speciale 2012).
  - Exposure to information about problems immigration can address can increase public support for open immigration policies (Facchini, Margalit, and Nakata 2022).

*Source: CANADA — INTERNATIONAL MONETARY FUND (excerpts and figures/tables as presented in the supplied content).*

### Annex II. External Sector Assessment

### Annex II. External Sector Assessment

### Overall Assessment
- The external position in 2023 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- The external current account deficit widened slightly in 2023, mainly reflecting worsened terms of trade as energy and commodity prices normalized following the start of Russia’s war in Ukraine.
- The widening of the CA deficit occurred despite:
  - lower goods imports: -0.8 percent decrease,
  - higher goods exports reflecting stronger US demand,
  - a weakening in the real exchange rate.

### Potential Policy Responses
- Policies should aim to boost Canada’s competitiveness in non-fuel goods exports and in services exports and to diversify Canada’s export markets. Suggested measures include:
  - (i) introducing measures to improve labor productivity;
  - (ii) removing nontariff trade barriers;
  - (iii) investing in R&D and physical capital;
  - (iv) investing in the green transformation;
  - (v) promoting FDI.
- Industrial policies should be pursued cautiously, remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions, and aim to minimize trade and investment distortions.
- Tighter near-term fiscal policies as well as a medium-term fiscal consolidation plan would help stabilize debt and support external rebalancing.

### Foreign Asset and Liability Position and Trajectory
Background
- Canada’s NIIP position rose sharply to 57.6 percent of GDP in 2023 from 38.9 percent of GDP in 2022 (and up also from the 5-year average of 40.7 percent of GDP), reflecting a rise in global equity prices (in the context of a somewhat weaker currency).
- Gross external debt increased to 143.2 percent of GDP (from 134.9 percent of GDP in 2022), of which around 41 percent is short term.
Assessment
- Canada’s foreign assets have a higher foreign-currency component than its liabilities do, which provides a hedge against currency depreciation.
- The NIIP level and trajectory are sustainable.
Key 2023 figures (% GDP)
- NIIP: 57.6
- Gross Assets: 309.9
- Debt Assets: 84.0
- Gross Liab.: 252.3
- Debt Liab.: 143.2

### Current Account
Background
- The estimated CA deficit reached 0.7 percent of GDP in 2023, slightly higher than the 0.4 percent of GDP deficit in 2022, mainly on account of lower energy prices (with the terms of trade fell by 6 percent y/y).
- With savings somewhat higher than—and investment broadly in line with—the 2019-22 average, the CA deficit in 2023 was somewhat smaller than the average CA deficit of 1.1 percent of GDP during 2019-22.
- The current account is expected to remain in slight deficit over the medium run. Export growth is projected to slow whereas import growth is projected to pick up on the back of recovering domestic demand, which is supported by a slightly expansionary near-term fiscal stance.
Assessment
- The cyclically adjusted CA was -1 percent of GDP in 2023, as against the EBA’s CA norm for Canada of 2.3 percent of GDP, implying a gap of -3.3 percent of GDP for 2023.
- Part of this gap is explained by biases in measuring inflation and retained earnings. Taking these factors into account, IMF staff assess the CA gap to be in the range between -2.2 and -1.3 percent of GDP, with a midpoint of              -1.8 percent of GDP.
Key 2023 figures (% GDP)
- CA: -0.7
- Cycl. Adj. CA: –1
- EBA Norm: 2.3
- EBA Gap: –3.3
- Other Adj.: 1.5

### Real Exchange Rate
Background
- The average REER for 2023 was 3.6 percent below the 2022 average, largely reflecting the strength of the US dollar.
- The REER in 2023 was around 2 percent weaker than the 2019-22 average.
- As of April 2024, the REER had depreciated by 1.3 percent relative to the 2023 average.
Assessment
- The EBA REER index model points to an overvaluation of 0.5 percent in 2023, while the REER level model suggests an undervaluation of 12.9- percent.
- Consistent with the staff CA gap, staff assess the REER to be overvalued by between 5.1 and 8.3 percent, with a midpoint of 6.7 percent (with a semi-elasticity of the CA with respect to the REER at 0.27).

### Capital and Financial Accounts: Flows and Policy Measures
Background
- The financial account recorded net inflows due to other investments, moderated by outflows in FDI and portfolio investments.
- FDI saw net outflows of 1.6 percent of GDP in 2023 (comparable with levels in 2022 and 2021).
- Net portfolio flows were around 0.7 of GDP (outflows), moving from inflows of around 5.3 percent of GDP in 2022.
- Other investments recorded inflows of around 3.2 percent of GDP as opposed to net outflows in 2022 of around 3 percent of GDP.
- Errors and omissions were small at 0.2 percent of GDP.
Assessment
- Canada has an open capital account. Vulnerabilities are limited by a credible commitment to a floating exchange rate.

### FX Intervention and Reserves Level
Background
- Canada has a free-floating exchange rate regime and has not intervened in the FX market since September 1998 (except for participating in joint interventions with other central banks).
- Canada has limited reserves, but its central bank has standing swap arrangements with the US Federal Reserve and four other major central banks. (The Bank of Canada has not drawn on these swap lines.)
Assessment
- Policies in this area are appropriate to the circumstances of Canada.
- The authorities are strongly committed to a floating regime which, together with the swap arrangements, reduces the need for reserve holdings.

### Notes on Measurement Biases
- Inflation compensation is not recorded in the income balance, which is recorded in nominal terms. This yields an estimated downward bias of 0.9 percent of GDP.
- Retained earnings on portfolio equity are not recorded, but can be estimated from stock positions, financial market data, and the national accounts. The downward bias from this is estimated to amount to 0.6 percent of GDP.
- Total estimated downward bias on the income balance: 1.5 percent of GDP.

*Source: IMF staff summary of "Annex II. External Sector Assessment."*

### Annex III. Figure 5. Realism of Baseline Assumptions

### Annex III. Figure 5. Realism of Baseline Assumptions

### Forecast Track Record and Realism Metrics
- Forecast vintages: Projections made in the October and April WEO vintage.
- Comparator metrics shown: Public debt to GDP; Primary deficit; r - g.
- Color code for historical output gap revisions: 
  - Exchange rate depreciation █ > 75th percentile
  - SFA █ 50-75th percentile
  - real-time █ 25-50th percentile
  - █ < 25th percentile
- Historical output gap revisions are calculated as the percentile rank of the country's output gap revisions (defined as the difference between real time/period ahead estimates and final estimates in the latest October WEO) in the total distribution of revisions across the data sample.
- Data coverage: annual observations from 1990 to 2019 for MAC advanced and emerging economies. Percent of sample on vertical axis.

### Public Debt Creating Flows and Fiscal Adjustment
- Public Debt Creating Flows chart elements:
  - Bond Issuances (bars, debt issuances (Percent of GDP) (RHS))
  - Avg marginal interest rates (lines, (LHS, percent))
- 3-Year Debt Reduction and 3-Year Adjustment in Cyclically-Adjusted Primary Balance shown (Percent of GDP; percent of GDP).
- Distribution metrics:
  - 3-year adjustment above 75th percentile (2 ppts of GDP)
  - 3-year debt reduction above 75th percentile (5.9 ppts of GDP)
  - Percentile rank shown: 44 (for a distribution element)
  - Percentile rank shown: 75.3 (for another distribution element)
- Implied spread, Laubach rule: The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.

### Fiscal Adjustment, Growth Paths, and Multipliers
- Fiscal Adjustment and Possible Growth Paths:
  - Real GDP Growth lines, real growth using multiplier (LHS); bars, fiscal adj. (RHS) (in percent).
  - Baseline and scenarios shown: Baseline; Multiplier=0.5; Multiplier=1.
- Time series markers and axes visible in charts include years: 2019 2020 2021 2022 2023 2024 2025 2026 and 2013 2015 2017 2019 2021 2023 2025 2027 2029.
- Fiscal adjustment (rhs) and ranges displayed on axes include values: -20, -10, 0, 10, 20, 30, 40.
- Change in public sector debt components shown for "Past 5 years" and "Next 5 years" with axis labels including -25, -20, -15, -10, -5, 0, 5, 10 and categories: Primary deficit; Real interest rate and relative inflation; Real GDP growth; Exch. rate depreciation; Residual; Change in public sector debt.

### Commentary on Realism of Baseline
- The recovery from COVID-19 imparted complicated effects on the growth path.
- Realism analysis does not point to major concerns: past forecast errors were moderate and broadly in line with those in other economies.
- The projected deficit reduction is close to the median of the distribution.
- The slightly ambitious debt reduction reflects largely the withdrawal of sizable COVID-19 fiscal support.
- The large contribution of the residual to debt accumulation in the past five years was driven mostly by unprecedented liquidity support measures implemented in 2020, such as funding for emergency loans, tax deferral, and purchase of assets, notably mortgages.
- These loans and deferrals are expected to be paid off in the next few years, resulting in large negative contribution of the residual to debt accumulation.

### Key Chart Values and Labels (as presented)
- Timeline axis values: 2019 2020 2021 2022 2023 2024 2025 2026; 2013 2015 2017 2019 2021 2023 2025 2027 2029.
- Numeric axis ticks and sample values appearing in figures:
  - Percentage-point axis: -0.4, -0.3, -0.2, -0.1, 0, 0.1
  - Percent axis: -6, -4, -2, 0, 2, 4, 6
  - Percent of GDP axis: -20, -10, 0, 10, 20, 30, 40
  - Distribution axis: 0, 2, 4, 6, 8, 10, 12
  - Debt reduction distribution markers: -28 -24 -20 -16 -12 -8 -4 0 4 8 12 16 20 24 28
  - Rolling-window passthrough markers and other tick labels include: -7.5 -6.5 -5.5 -4.5 -3.5 -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5
- Highlighted distribution statistics: "3-year adjustment above 75th percentile (2 ppts of GDP)"; "3-year debt reduction above 75th percentile (5.9 ppts of GDP)"; percentile rank figures 44 and 75.3.

*Source: IMF Staff.*

### 3. The model pays particular attention to housing assets and liabilities. Earlier staff analysis

### 3. The model pays particular attention to housing assets and liabilities. Earlier staff analysis

### Model structure and household features
- The model distinguishes two asset types: low-return liquid assets, and high-return illiquid assets subject to transaction costs. Illiquid asset holdings include housing assets and liabilities.
- Classifications of assets use data from National Balance Sheet Accounts.
- Households’ idiosyncratic earning risks are characterized using estimates from Karibzhanov (2018), showing infrequent but large earning shocks for Canadian households (similar to the United States).

### Comparison periods and scenarios analyzed
- Impulse response functions are compared for two sample periods: 2000–23 (full period) and 2019–23 (recent years).
- Recent-period changes considered include:
  - variations in net asset holdings,
  - firms’ market power,
  - fiscal policy responses to monetary policy (involving less adjustment in expenses and transfers in response to increased government interest expenses due to higher rates).

### Key quantitative findings on assets, liabilities, and leverage
- Mortgage debt: average of 69 percent of GDP during 2000–23 versus 88 percent during 2019–23.
- Share of variable-rate residential mortgages: about 8 percentage points higher—30 versus 22 percent.
- Average net worth of households and firms: about 25 percent higher (2019–23 versus 2000–23).
- Net housing assets: increasing by more than 40 percent of GDP.
- Selected taxonomy of assets as share of GDP (National Balance Sheets Accounts):
  - Liquid (2000–2023 / 2019–2023)
    - Revolving Consumer Debt: -7.52 / -4.40
    - Deposits: 28.81 / 44.77
    - Corporate Bonds: -3.27 / 10.52
    - Government Bonds: 8.56 / 8.31
    - Total (Liquid): 26.58 / 59.20
  - Illiquid (2000–2023 / 2019–2023)
    - Net housing: 156.56 / 224.45
    - Net durables: 30.14 / 31.31
    - Corporate equity: 80.31 / 71.06
    - Private equity: 107.78 / 121.38
    - Total (Illiquid): 374.80 / 448.19
  - Grand Total: 401.38 / 507.39
- Source: Statistics Canada National Balance Sheets Accounts (as used in staff calculations).

### Implications for monetary policy transmission
- Overall conclusion from the model: effects on transmission of rising leverage and a greater share of shorter-duration mortgages were offset by higher household net worth.
- For saving/high-net-worth households:
  - Changes in interest rates produce a positive income impact for saving households.
  - Households with high net worth have a relatively small marginal propensity to consume; reductions in disposable income from higher rates are less compressive on aggregate demand.
  - High net worth households can maintain consumption by shifting portfolios.
- Cash-flow channel risk:
  - Rising policy rates could depress consumption among vulnerable homeowners with adjustable-rate mortgages who cannot borrow easily.
  - For the cash-flow channel to strengthen relative to the past, vulnerable households would need to hold a larger share of mortgage liabilities; staff find the distribution of housing assets and liabilities has not changed significantly across periods, implying the cash-flow channel has likely not increased recently.
- Renters:
  - Renters’ rising share in the population reduces direct exposure to mortgage rate changes; renters are affected indirectly through firms’ wages rather than mortgage-related debt.

### Factors that could have weakened transmission
- Fiscal stance:
  - A looser fiscal stance in response to higher interest rates could reduce transmission. Quantified effect: for each 1 percentage point of GDP extra in government debt on account of higher interest costs, inflation reduction may be lower by up to 40 basis points.
- Firms’ market power:
  - Increased market power allows firms to pass on cost increases more effectively; quantified effect: about 1.8 basis points less inflation reduction for each 1 percent increase in markups (as noted by Bilyk, Grieder, and Khan (2023)).

### Model limitations and caveats
- The model does not capture:
  - the impact of higher rates on the evolution of housing prices,
  - the impact of synchronized monetary policy tightening across advanced economies,
  - the role of housing as financing collateral.
- Further model extensions incorporating these elements could clarify impacts on monetary policy transmission in the recent period.

### Annex VII — Housing supply, consequences, and international lessons
- Per capita housing stock:
  - OECD average: 485 dwellings per 1000 inhabitants (average).
  - Canada: 419 dwellings per 1000 inhabitants in 2020 (and even less in more recent years).
- Canada’s housing gap and construction needs:
  - CMHC official estimate: Canada’s housing gap is more than 3.5 million units (defined as extra dwellings needed to return affordability to 2004 levels).
  - Household formation: averaging about 250,000 per year.
  - Required annual building to meet new demand and address pre-existing gap by 2040: 500,000 units annually.
  - Historical house completions: ranged from 150,000 to 250,000 over the past 20 years.
- Social housing: Canada has a particular shortage in social housing compared to other OECD countries.
- Consequences:
  - Canada’s house price appreciation since 2001 is the highest among major OECD countries.
  - Canada’s rental price increase ranks among the highest globally, second only to the United States among G7 countries.
  - Affordability is particularly strained in provinces like British Columbia, among immigrant households, and among low-income households (elevated home price to income ratios; high shares of income allocated to mortgage costs).
- Drivers of low housing supply (as reported by authorities): under-investment, high land costs, lack of infrastructure, high construction costs, limited supply of certain housing segments (affordable rental housing), regional mismatches.
- Policy experiences and measures:
  - Demand-side measures for buyers: housing allowances, financial support for housing regeneration, subsidized mortgages and guarantees, tax incentives, subsidies for home ownership, mortgage relief (note: Canada has not adopted mortgage relief for over-indebted households).
  - Demand-side measures for renters: housing allowances, social rental housing, minimum quality standards, rent controls, short-term holiday rental regulations, tax incentives, rent guarantees, deposits.
  - Canada has banned nonresident purchases of real estate (noted as a capital flow management measure).
- Federal housing investment:
  - Average federal investment in housing development: Can$2.3 billion annually during 2007–15 versus Can$5.5 billion annually from 2015 to 2024.
  - The 2024 federal budget and Canada’s Housing Plan include measures to promote additional housing construction and to incentivize municipal action to unlock more supply.
- Short-term rental rules (examples):
  - Short-term rentals banned in some boroughs of Montreal.
  - Quebec and Vancouver: restrict the lengths of short-term stays to 31 days.
  - Toronto: allows for 180 days of hosting per year.
  - International comparisons: caps range from 31 days/year (Amsterdam), to 8 weeks/year (Munich), to 90 days/year (Vienna, London).
  - Empirical evidence: Bibler et al. (2022) show that enforcing registration requirements decreased house prices in the most Airbnb-dense areas in Chicago and San Francisco by 4 percent (study cited in source).
- Cross-country institutional examples:
  - The Netherlands: self-funded housing associations manage about 75 percent of rental homes and about 35% of total housing stock; proceeds rechanneled into maintaining stock and adding new affordable units.
  - United Kingdom: dedicated housing ministry (Ministry of Housing, Communities & Local Government) supported delivery targets aiming at 300,000 net additional homes a year on average by the mid-2020s.
  - Singapore: GLS Programme releases public land for development under long-term statutory planning.
  - Hong Kong SAR: measures include ramping up public housing production, enhancing public-private partnerships, providing public land for private housing development, cutting red tape, and standardizing land premium charging.
- Policy recommendations (staff)
  - Continue investment in housing to increase supply; aggressive federal policies are essential.
  - Scale up measures such as the Housing Accelerator Fund (which conditions fiscal transfers on subnational efforts to expand housing).
  - Strengthen effective policy coordination across administrative levels and institutions; consider establishing a housing forum that convenes stakeholders and clarifies land use and housing strategies across governance levels.
  - Ensure housing policies support vulnerable groups; new development projects should include units sold below market prices to help low-income households and youth.

*Source: IMF staff analysis and Canada Annex material provided in the content unit.*

### Annex VIII. Bank-NBFI Linkages

### Annex VIII. Bank-NBFI Linkages

### Overview
- This annex discusses the evolution of banks and non-bank financial intermediaries (NBFIs) in Canada and explores their linkages through the information content of stock prices.
- Prepared by Pierpaolo Grippa.

### Size and composition of the Canadian financial system
- Total assets of banks and NBFIs reached $14 trillion or 681 percent of GDP as of end-2022.
- Stock market capitalization amounted to $2.7 trillion at end-2022, equivalent to 127 percent of GDP.
- Canadian subsectors that stand out: pension funds and other financial institutions (OFIs).
- Market-share dynamics (2002–2022):
  - Canadian banks: market share slightly larger in 2022 than 2002 (36 vs 33 percent).
  - OFIs: increased from 37 to 42 percent over the past twenty years.
- International comparison: unlike other advanced economies where banks’ market share declined (48 to 39 percent between 2002 and 2022) and OFIs expanded (almost 26 to 38 percent), Canada’s subsector shares have not changed significantly through time.

### Bank exposures to NBFIs and cross-sector linkages
- Banks’ exposure to pension funds and ‘other OFIs’ in Canada stands out internationally:
  - Exposure to pension funds: 3 percent of banks’ assets.
  - Exposure to ‘other OFIs’ (including hedge funds): 4 percent of banks’ assets.
  - These represent the largest bank exposures to NBFIs across advanced economies (as stated in the source).

### Risks arising from NBFI asset mixes and funding behavior
- Institutional investor asset mix concerns:
  - Pension funds have increased exposure to illiquid asset classes such as private equity; this trend continued in recent years.
  - The “Maple Eight” (eight largest Canadian public pension funds) show:
    - The share of “More Liquid Assets” has constantly decreased on average over the past ten years.
    - Investments in private equity have increased.
    - Investments in real estate have hovered around 15 percent.
- Potential instability channels:
  - Increased holdings of illiquid assets combined with repo financing and derivative hedging could expose institutions to liquidity squeezes via margin calls and spiking liquidity demand.
  - Some NBFIs (e.g., hedge funds) rely on significant leverage for arbitraging strategies (for example, the cash-futures basis trade on Canadian government bonds).

### Data gaps and institutional complications
- Persistent data gaps regarding NBFIs and their links with banks hinder detailed risk analysis.
- Canadian complications:
  - Fragmentation of competencies and roles across federal and provincial agencies complicates data availability and system-wide liquidity analysis.
  - Existing coordination mechanisms only partially compensate for fragmentation.
- The annex emphasizes the need for better data to determine whether reciprocal influence between banks and NBFIs has changed beyond volume shifts.

### Methodology for stock-price-based linkage analysis
- Following Acharya et al. (2024) approach:
  - Daily returns calculated for S&P TSX (2005–2024) and equally weighted average daily returns for TSX bank and NBFI constituents.
  - Daily excess returns computed by subtracting the 1-month Canadian Treasury bill yield (short-term risk-free rate).
  - Estimated daily market betas for each sub-index using rolling 90-day windows by regressing sub-index excess returns on TSX excess returns.
  - Abnormal return defined as: (Ridx,t – Rf t) – βidx,t*(RTSX,t – Rf t).
- Granger-causality tests run between abnormal returns of banks and NBFIs in both directions, using the same sub-period categorizations as Acharya et al.

### Empirical findings from stock-price analysis
- Abnormal-return correlation:
  - Typical correlation between banks and NBFIs abnormal returns hovers around 20 percent and rarely surpasses 40 percent in ordinary conditions.
  - Correlation can dip into negative territory (noted through most of 2019 until COVID outbreak).
  - During stress episodes correlations spike:
    - As high as 60 percent during oil price shock and COVID outbreak.
    - As high as 80 percent during the Global Financial Crisis (GFC).
- Granger-causality results:
  - The tests confirm increased reciprocal influence between banks and NBFIs during stress episodes.
  - Evidence points to a potential increasing influence of NBFIs on banks in recent years, notably during the pandemic—though the recent sample is limited for definitive conclusions.
  - The reciprocal influence between sub-sectors in Canada appears more balanced than in the US (per comparison with Acharya et al.).

### Conclusions and policy implications
- Interaction between banks and NBFIs could act as a shock amplifier in stressed market conditions, and potentially more so now than in the past.
- Findings do not indicate a “take over” of banks by NBFIs in Canada (unlike some other advanced-economy jurisdictions).
- Tests on abnormal returns suggest the influence of NBFIs on banks might be increasing, especially under stress; the underlying mechanism (direct bank exposure vs indirect linkages) remains to be determined, subject to data availability.
- Given:
  - The size of NBFIs in Canada,
  - Increasing illiquid and leveraged investment strategies pursued by some NBFIs,
  heightened scrutiny of the larger nonbank players is necessary.

*Annex VIII. Bank-NBFI Linkages (Prepared by Pierpaolo Grippa).*

### 4. Labor productivity differs significantly across provinces, largely because of

### 4. Labor productivity differs significantly across provinces, largely because of productivity differences within sectors

### Provincial productivity patterns
- Northwest Territories displays the highest labor productivity, almost 50 percent above the Canadian average, followed by Nunavut and Alberta.
- Other provinces, including Prince Edward Islands, Nova Scotia and New Brunswick report labor productivity levels significantly below the Canadian average.
- Different sectoral compositions across provinces matter, especially in provinces with a large mining and oil/gas extraction sector (Newfoundland and Labrador, Saskatchewan, Alberta, Nunavut and Northwest Territories) in which investment and capital intensity are comparatively high — the sector with the highest labor productivity in Canada in 2022.
- In most provinces, productivity differences are mostly explained by within-sector differences, potentially highlighting the role of persistent interprovincial trade barriers.
- Labor productivity is defined as the ratio between real value added and hours worked (Stat Can).

### Aggregate investment and sectoral allocation
- A large share of Canadian investment is bound in mining and oil/gas extraction.
- Canada leads the G7 in mining, oil/gas extraction, and transport investment shares, but faces investment challenges in almost all other sectors.
- Compared to Australia, investment allocation is less diversified in Canada.
- Investment per available worker is weak in machinery and equipment and especially in intellectual property products (IPP), which constrains labor productivity.

### Firm-level evidence on investment and productivity
- Sample: 30,000 firm-year observations covering the period from 2000 to 2024 (Standard & Poor's Compustat data; publicly traded Canadian firms only).
- Key empirical finding: Canadian firms’ productivity growth is strongly correlated with their investment levels, even after controlling for firm size, firm age, leverage ratio, and other idiosyncratic characteristics as well as year fixed effects. Exogenous tightening and loosening of financial conditions are used as instruments and results are robust to various definitions of productivity.

- Annex X. Table 1. Canada: Corporate Investment, Productivity, and Valuation (coefficients; robust standard errors in parentheses)
  - Labor productivity: 0.095** (0.037); No. of Obs.: 15,293
  - TFP: 0.031*** (0.006); No. of Obs.: 11,079
  - Tobin's q: 0.161* (0.091); No. of Obs.: 20,078
  - Controls: YES; Firm FE: YES; Year FE: YES
  - Notes: *** p<0.01, ** p<0.05, * p<0.1

- Interpretation:
  - Higher corporate investment is associated with higher productivity growth and higher corporate valuation (Tobin’s Q).
  - Increasing investment can potentially enhance firms’ valuation and prospects for future growth.

- Factors influencing corporate investment decisions (summary from Annex X. Table 2):
  - Financial constraints: external finance dependence (significance: √, sign: −), liquidity (√, sign: −)
  - Changing nature of investment: intangibles (√, sign: −), high-tech intensiveness (√, sign: +)
  - Competition: industry concentration (√, sign: +)
  - Governance: payout ratio (×)
  - Firm characteristics: firm size (×), firm age (×), leverage (×)

### Artificial intelligence (AI) — exposure, complementarity, and productivity implications
- Methodology: replicate a “complementarity-adjusted AI occupational exposure index” using O*NET; distinguishes occupation-level exposure and complementarity to AI.
- Adoption caveats: realizing potential impacts of AI requires adoption, infrastructure, and an appropriate regulatory framework. Canada currently has no regulatory framework specific to AI; the Artificial Intelligence and Data Act (AIDA) was introduced as part of Bill C-27 in November of 2021 and had passed second reading and was being studied; a Voluntary Code of Conduct on the Responsible Development and Management of Advanced Generative AI Systems was introduced in 2023.
- Adoption indicators: CGI 2023 report — 65 percent of Canadian organizations are investing or conducting proofs of concept using AI but only 4 percent have implemented AI.
- Occupational impacts in Canada:
  - Professionals and technicians display the highest share of high exposure and high complementarity workers (likely to benefit from AI).
  - Clerical support workers face higher risk of substitution (high exposure but low complementarity).
  - Machine operators are low-exposure and less likely to be significantly affected.
  - Compared to the UK and the US, the share of likely-to-benefit managers is larger in those countries; a large share of Canadian technicians faces relatively high substitution risks.
- Aggregate implications:
  - High AI exposure is associated with higher total factor productivity (TFP) and corporate valuation in Canada, while it appears to have no relation to labor productivity.
  - A smaller share of the Canadian labor force is in highly exposed occupations compared to the US and UK; hence AI’s aggregate productivity boost may be smaller in Canada, implying persistent productivity gaps.
  - Distributional effects: In Canada, occupations that will benefit from AI are distributed more evenly across the income distribution, suggesting AI is less likely to worsen income inequality than in some comparators. However, more highly educated workers and males are more likely to benefit, and middle-aged workers may benefit more than the young and the old — all of which point to potential risks of worsening inequality and gender gaps.

- Annex X. Table 3. Canada: AI and Productivity (coefficients; robust standard errors in parentheses)
  - Labor productivity: -0.002 (0.002); No. of Obs.: 307; Adjusted R2: 0.156
  - TFP: 0.037** (0.019); No. of Obs.: 528; Adjusted R2: 0.162
  - Tobin’s q: 4.857*** (1.853); No. of Obs.: 528; Adjusted R2: 0.248
  - Controls: YES

### Conclusions and policy recommendations
- Key conclusions:
  - Canada’s long-standing investment challenges outside of mining and oil/gas extraction increasingly reflect in strained labor and multifactor productivity.
  - Capital misallocation concerns, including a higher share of zombie firms compared to peers, put further downward pressure on productivity. These issues are emerging in mining, quarrying, and oil/gas extraction and may become more severe with the green transition.
  - Firm-level analysis indicates potential to increase productivity by increasing firm investment, particularly in high-tech areas such as AI.
  - AI has the potential to boost productivity, but it will likely not close Canada’s productivity gaps relative to peers because of occupational structure differences.

- Policy recommendations:
  - Improve the overall business environment and increase and incentivize total R&D spending to stimulate growth prospects.
  - Reprioritize investment into ICT- and R&D-focused sectors.
  - Promote a pro-innovation policy mix evolving around:
    - public investment for fundamental research,
    - grants for innovative start-ups and young firms,
    - R&D tax incentives.
  - Address financial constraints and competition issues to stimulate corporate investment.
  - Design broad-based AI adoption strategies and risk mitigation measures to limit adverse distributional effects, especially for vulnerable groups.
  - Encourage commercialization and adoption of AI and related technologies; ensure supporting infrastructure and an appropriate regulatory framework.

*IMF staff calculations and analysis based on StatCan and firm-level data presented in the source content.*

### 2.      Gendered care work reduces time available for women to perform paid work. T he

### 1canea2024001 - 2.      Gendered care work reduces time available for women to perform paid work. T he

### Overview
- Unequal distribution of unpaid household responsibilities, notably childcare, reduces women's labor force participation (LFP) and hours worked, with persistent human capital depreciation from prolonged workforce absence.
- The federal Canada-wide early learning and childcare plan (2021 Budget) targets bringing fees for regulated childcare down to Can$10 per day on average by 2026 (Quebec excluded, having introduced an affordable system in 1997).

### Model and calibration
- An overlapping generations gender model (OLG) calibrated to Canada is used to estimate long-run macroeconomic effects of reducing childcare fees.
- Model features:
  - Heterogeneous agents by gender, age group, educational attainment, and immigrant status.
  - Two household types: couples (who may have children) and single households without children; couples share utility and incur an additional disutility when the female works while raising children.
  - Childcare cost included in the budget constraint when the mother is employed.
  - Representative firm hires male and female effective labor hours, rents capital at rate r*, and produces the consumption good. Production function calibrated for capital share, depreciation, TFP growth, and unexplained gender pay gaps.
  - Government revenue: taxes on labor income (labor income tax and social security contributions), consumption (VAT), and firms’ revenues; expenditures on goods, childcare, and pension benefits.
- Calibration uses Canada’s micro and macro data, capturing demographics, returns from experience, human capital accumulation, and gender differences in hours and LFP.
- Policy experiment assumption: childcare fees paid by households decrease from an average of Can$43/day to Can$10/day. The Can$43/day initial cost is a country-average calculated using Statistics Canada estimates; model abstracts from infrastructure and staff costs needed to expand supply.

### Key quantitative results (long-run, model estimates)
- Female labor force participation:
  - Program could increase female LFP by at least 5.5 percentage points in the long term.
  - For women with young children, estimated increase in female LFP of 6.7 percentage points.
  - Increase in LFP concentrated across all age groups, notably women aged 25 to 59 years, and larger for women without university degrees.
- GDP and macro effects:
  - Permanent 1.8 percent increase in GDP compared to a scenario without the program.
  - Aggregate consumption would increase driven by higher disposable income for families where women enter the labor market.
- Labor market and wage effects:
  - Hours worked by males would slightly decrease by 0.3 percent.
  - Average female wages would decrease by 1.3 percent as less-educated women join the workforce.
- Childcare system capacity:
  - Model estimates that 100,200 children could be added to the childcare system (reflecting children needing childcare because mothers re-entered the labor force).
- Comparison with Quebec experience:
  - Quebec program previously estimated to boost GDP by about 1.7 percent and increase employment rate of mothers with young children by around 7-8 percentage points.

### Scenario: childcare affordability plus elimination of unexplained gender pay gap
- Scenario assumptions:
  - Childcare costs decrease to Can$10/day.
  - Unexplained gender pay gap goes from around 10 percent to zero.
- Scenario outcomes:
  - Female LFP would increase by 8.4 percent (instead of 5.5 percent).
  - GDP gains would amount to 8.3 percent (instead of 1.8 percent).

### Distributional and dynamic considerations
- Larger LFP gains for less-educated women align with Quebec evidence where increases in LFP were greater for females with lower education.
- Increase in participation for older women arises because fewer women drop out during child-rearing years, allowing continued accumulation of experience and human capital.
- The model’s estimates are long-term; effects of program rollout may take time to materialize and depend critically on supply-side investments (infrastructure, training and retention of early childhood educators, building centers).
- Caveat: model assumes supply expands to meet demand; without such investment, fee reductions could primarily benefit families already with access, and short- to medium-term total policy costs may be underestimated.

### Policy implications
- Reducing childcare fees to Can$10/day could generate substantial long-term economic and fiscal gains through higher female labor force participation, higher GDP, and increased aggregate consumption.
- Complementary policies are important:
  - Invest in expanding childcare capacity (infrastructure and trained staff) to ensure fee reductions translate into increased access.
  - Policies to reduce gender biases and the unexplained gender pay gap could substantially amplify economic gains.
- The long-term multiplier of the childcare policy could be comparable to long-term multipliers found for public investment, conditional on accompanying investments to expand quality capacity.

### Annex XII (Climate mitigation policies) — brief highlights relevant to broader policy context
- Canada’s Pan-Canadian Framework targets reducing emissions in 2030 by between 40 and 45 percent relative to 2005 levels, centered on a carbon pricing system with a planned path of Can$80/ton CO2 in 2024 to Can$170 in 2030.
- Projected increase in carbon prices to Can$170 by 2030 is expected to decrease emissions by about 17 percent versus 2023 levels, and 28 percent with respect to 2005 levels (other policies to close the remainder toward the 40-45 percent target).
- A firm-level general equilibrium model finds carbon taxation results in the lowest consumption and fiscal costs for a similar emissions reduction (between 14 and 15 percent) compared with subsidies for capital upgrades or R&D.
- Empirical evidence shows firm-level heterogeneity in emission intensity: less productive and less knowledge-intensive firms have higher emission intensities.

*Source: Excerpts from IMF staff analysis and model results in the supplied content unit.*

### Annex XII. Figure 4. Channels of Emissions Reduction

### Annex XII. Figure 4. Channels of Emissions Reduction

### Key quantitative findings
- An increase in tax to CAD 170 is estimated to result in a 17 percent reduction in emissions.
- All values in columns (1) to (3) are in terms of percentage changes relative to the actual economy with a CAD 65 carbon tax.
- Using the IMF-ENV model, IMF staff estimated that Canada’s carbon pricing alone could deliver a decrease of 29 percent in emissions relative to BAU (business as usual) at a cost of between 0.2 and 1.2 percent of GDP.
- Previous IMF staff analysis estimated that the burden on households of increasing carbon price to Can$170 would be around 2 percent of consumption prior to revenue use.
- A contrasting box forecast reports a cost of about 3.8 percent in the net present value of consumption; one stated difference is that the GE model of Capelle et al. does not consider changes in the energy mix by utilities companies.

### Data sources and measurement notes
- Sources: ICE Data Services, S&P Compustat Global, IMF staff calculations (see Capelle et al (2023)).
- ICE Data Services contains self-reported yearly firm-level emissions which are based on the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard.
- S&P Compustat Global covers firms that issue publicly traded securities.
- Note: All values in columns (1) to (3) are expressed as percentage changes relative to the actual economy with a CAD 65 carbon tax.

### Analytical conclusion and policy implication
- Taken together, the estimates and different analyses confirm that carbon pricing remains the most efficient tool to reduce emissions, even when considering within-industry heterogeneity and technological adoption.
- The range of estimated macroeconomic costs (0.2 to 1.2 percent of GDP versus alternative estimates such as 3.8 percent NPV of consumption) highlights sensitivity to modeling assumptions, notably whether models allow for changes in utilities’ energy mix.

*Source: Annex XII. Figure 4. Channels of Emissions Reduction — IMF staff text and notes.*

### Annex XV. State of Progress in the Implementation of 2019 FSAP Key

### Annex XV. State of Progress in the Implementation of 2019 FSAP Key Recommendations

### Develop the policy framework for managing a housing market downturn (BOC, AMF, BCSC, OSC)
- Progress by June 2023:
  - AMF: Revised two approaches (Standard Approach (SA) and Internal Ratings Based (IRB) Approach) used to determine risk-weighted assets for mortgage exposures in its Capital Adequacy Requirements Guideline. For the SA approach, a new loan-to-value (LTV) bucket introduced for uninsured mortgage loans and more conservative risk-weights must be applied. On the IRB approach, a new “Loss Given Default (LGD) downturn” introduced to account for through-the-cycle risks. Changes published and in effect since February 2023.
  - OSFI: Introduced a crisis preparedness framework to improve internal preparedness of idiosyncratic events at a DTI. Training provided in spring 2022; work continues to incorporate systemic concerns and governance. In January 2023, OSFI launched a public consultation of Guideline B-20 on Residential Mortgage Underwriting Practices and Procedures, seeking stakeholder feedback on complementary debt service ability measures.
  - AMF: Updated Residential Hypothecary Lending Guideline twice in last three years; in June 2021 changed rate used in calculation of debt service for uninsured mortgages to the greater of the contractual mortgage rate plus 2 percent and a fixed floor rate initially at 5.25 percent; introduced annual review; in June 2022 removed reference to fixed rates to adapt to market volatility; expectation added to require updates to residential property value for LTV calculation; monitoring combined loan plans, reverse mortgages, residential equity mortgages.
- Progress by May 2024:
  - AMF: Updated Residential Hypothecary Lending Guideline in February 2024 to introduce expectations for combined loan plans, reverse hypothecary loans and hypothecary loans with shared equity features; publicly expressed intention to review guideline in coming year to ensure robustness against housing market downturns; discussions with OSFI to maintain level playing field.
  - OSFI: Continued public consultation and work on Guideline B-20 (debt serviceability measures).

### Modernize the systemic risk oversight framework; federal-provincial platform and transparency (HOA, BOC)
- Progress by June 2023:
  - BOC: Systemic Risk Surveillance Committee (SRSC) meets regularly; formed SRSC subgroup on liquidity mismatch in open-ended investment funds and subgroup on investor demand for housing. Bank continues to include a box in its FSR on HoA activities.
  - HoA: In spring 2022, HoA members signed an MoU for protection of confidential information shared among the HoA; SRSC members not in HoA adhered by Letter of Adherence.
- Progress by May 2024:
  - BOC: SRSC continues to meet at a regular frequency. Financial Stability Department created a new Systemic Risk Analytics team focused on interconnections and contagion across financial system participants (including NBFIs).
  - HOA/SRSC: SRSC reports to HoA; SRSC membership broader than HoA to obtain wide view on systemic risk.

### Develop a comprehensive systemic risk surveillance framework and unified data collection; address data gaps (BOC, competent authorities, governments)
- Progress by June 2023:
  - BOC: SRSC discussions focus on vulnerabilities informed by members’ data; limitations exist where no SRSC member has required data (e.g., high frequency holdings data for some NBFI); distributed data across agencies limits cross-market analysis and identification of vulnerabilities; not all agencies have same analytic expertise.
  - OSFI: Worked with industry to develop and expand datasets for key portfolios (including granular reporting on RESL exposures and leveraged lending exposures). OSFI, BoC, and CDIC working on Data Collection Modernization (DCM) initiative to modernize data collection technology and provide access to more timely, granular, and trustworthy data; benefits include efficiencies, reduced regulatory burden on FRFIs, standardized data definitions, and real-time advanced analytics.
  - BoC: Cooperative voluntary data sharing agreements with asset managers, market infrastructures, and other regulatory agencies; examples include SAN on liquidity risk at Canadian life insurance companies using proprietary OSFI data; forthcoming SAN on basis trade using Montreal Exchange data; proof-of-concept analysis with OSC and AMF to use OTC derivatives data to measure liquidity risk exposures for certain NBFIs.
  - AMF: Working with OSFI in 2024 to develop and administer SCSE (Standardized Climate Scenario Analysis); participates in semi-annual SRSC meetings; AMF is finalizing granular RESL disclosure similar to OSFI’s, BCFSA’s and FSRA’s returns and expects to start collecting data later in 2024; participates in CUPSA risk data sharing mechanism work.
- Progress by May 2024:
  - BoC: Continues voluntary data sharing and proof-of-concept discussions with market infrastructures to obtain additional futures market data; engaged in matching mortgage underwriting data to credit bureau data to monitor non-mortgage debt of mortgage holders.
  - OSFI: Continued expansion of datasets and DCM progress.
  - AMF: Engaged on SCSE with OSFI; finalizing RESL disclosure for collection in 2024.

### Enhance risk monitoring of banks’ funding, nonbank risk-taking, housing finance vulnerabilities, cross-border and intra-system interconnectedness (BOC lead; HOA, SAC; OSFI, AMF)
- Progress by June 2023:
  - AMF: Ensures D-SIFI cooperative under its supervision participates in BOC macro stress-test (MST) exercises; participates with other regulators in BOC-led climate-related crisis simulation exercise; participates in semi-annual SRSC meetings; member of CUPSA.
  - CSA/OSC: Participate in SRSC and SRSC subgroups; OSC made investment fund survey regular and shared with BoC; BoC working on obtaining derivatives data from OSC/CIRO via MOU.
  - BoC: Operationalized new bank returns (e.g., updated EB/ET); StatCan progressed on "from-whom-to-whom" financial accounts; matched mortgage underwriting to credit bureau data.
- Progress by May 2024:
  - AMF: Active SRSC participation; CUPSA membership and engagement on risk data sharing.
  - CSA: Active SRSC participation and subgroup engagement.

### Strengthen oversight of large public pension funds and increase transparency of financial disclosures (DOF, provincial governments)
- Progress by June 2023:
  - Plans continue to consider whether enhanced oversight and increased transparency are necessary; no timeline to date.
- Progress by May 2024:
  - No updates.

### Strengthen autonomy and governance of financial sector authorities, clarify roles for overseeing systemically important FMIs (DOF, provincial governments; BOC; AMF, BCSC, OSC)
- Progress by June 2023:
  - DOF: OSFI has required autonomy and governance; OSFI’s guidelines are enforceable.
  - BoC and provincial authorities continue to cooperate effectively; existing arrangements with overlapping responsibilities reflect federal-provincial division of powers; no changes made in response to FSAP recommendation.
  - AMF: MoUs with BoC and CDIC (2018) operational; regular technical/quarterly meetings; regular meetings with Québec Minister of Finance (MFQ) on resolution framework matters; joint work plan implemented.
  - CSA/BoC: Coordination documented through a 2014 MoU “Respecting the Oversight of Certain Clearing and Settlement Systems”; further MoU on resolution of certain clearing and settlement systems effective January 13, 2022.
- Progress by May 2024:
  - AMF: MoUs fully operational; meetings with MFQ on operationalization of the Resolution Board, formalized January 2024; first official meeting March 2024, next scheduled May 2024.
  - OSFI: No further legislative work at this time.

### Complete the Cooperative Capital Markets Regulatory System initiative (DOF, provincial governments)
- Progress by June 2023:
  - DOF: Capital Markets Authority Implementation Office paused March 2021; federal Canadian Securities Transition Office ceased March 2022; government remains committed to working with provinces/territories to implement Cooperative System. CSA: Work ceased on the Capital Markets Regulatory Authority; CSA continues harmonizing regulation and enhancing collaboration with federal and provincial agencies.
- Progress by May 2024:
  - No updates.

### Enhance inter-agency cooperation, additional MoUs (OSFI, AMF, provincial authorities)
- Progress by June 2023:
  - OSFI: Heads of Agencies Committee (HoA) meets regularly; supported by sub-HoA and SRSC. AMF: Participates in HoA quarterly meetings; membership in CUPSA and Canadian Consumer Protection for Financial Institution Failures; technical and quarterly meetings with BoC and CDIC; discussions on MoU with OSFI resumed after pandemic pause.
  - CSA: In spring 2022 HoA members signed an MoU for protection of confidential information; agreement in principle for SRSC members not part of HoA to adhere.
  - BoC: MoU for confidential information protection in place across agencies participating in HoA and SRSC.
- Progress by May 2024:
  - OSFI: Finalized an MoU on information sharing among federal and provincial members of HoA; more frequent/structured contacts with provincial deposit-taking and insurance regulatory associations (CUPSA/CCIR); recurring engagement with Quebec’s AMF and exchange plan finalized; dedicated OSFI team for provincial engagement.
  - AMF: Resumed discussions with OSFI between legal departments to resolve confidentiality protection for MoU adherence.

### Address shortcomings in regulatory and supervisory frameworks related to credit risk of mortgage exposures; common loan forbearance framework (OSFI, AMF, provincial supervisors)
- Progress by June 2023:
  - OSFI: June 28, 2022 supplementary Advisory to Guideline B-20 clarified treatment of innovative RESL products; reinforced LTV limits for combined mortgage-HELOC loan plans (CLPs) and reverse mortgages. January 12, 2023 initial consultation on Guideline B-20 focusing on debt serviceability; B-20 review to continue over 2023-24.
  - AMF: Working on Non-Performing Loans and Forbearance Guideline expected to come into force December 2023.
- Progress by May 2024:
  - OSFI: Does not intend to pursue adopting a common framework to monitor forborne exposures in all jurisdictions. CAR Guideline updated to include Basel III reforms, effective fiscal Q2:2023; revised capital treatment of mortgages backed by private mortgage insurers (PMIs); effective fiscal Q1:2024 CAR and MICAT guidelines updated to include higher capital requirements for lenders and mortgage insurers to align with risks associated with growing mortgage balances due to increased interest rates (negative amortization).
  - AMF: Public consultation on Guideline on the management of expected credit losses ended April 29th; final version planned by June 2024. AMF updated Residential Hypothecary Lending Guideline in February 2024 with expectations for combined loan plans, reverse loans, and shared equity features.

### Strengthen legal foundation for insurance group-wide supervision and consistent application to group-side supervision (OSFI, AMF; DOF, Québec government)
- Progress by June 2023:
  - AMF: Legislative amendments required to grant powers over unregulated holding companies and enhance group-wide supervision capability; discussions ongoing with Québec Ministry of Finance.
  - OSFI: Group-wide supervision undertakings communicated in annual supervisory letters for two IAIGs with unregulated holding companies; P&C insurance undertakings strengthened for consistent group-wide capital calculations under MCT.
- Progress by May 2024:
  - No legislative amendments finalized; discussions continue.

### Complete reforms in OTC derivatives and client duties; oversight of high-impact firms; capacity to handle market-wide stress (CSA, provincial governments)
- Progress by June 2023:
  - CSA: Developed Business Conduct Rule; Registration Rule consultation earlier; Business Conduct rule scheduled for summer 2023; Trade Reporting Rules amendments proposed to align with PFMI and CPMI-IOSCO guidance; Mandatory Clearing Rules in effect since September 1, 2022.
  - Client Focused Reform (CFR): Conflicts of interest requirements came into force June 30, 2021; remaining requirements in force December 31, 2021. Ongoing compliance and oversight; CSA and CIRO published joint notice August 3, 2023 summarizing review of firms’ conflicts of interest practices.
  - Oversight of high-impact firms: Jurisdictional variation; Ontario has formal process; CSA working to finalize approach.
  - Market Disruption Coordination: CSA Market Disruption Plan tested September 18, 2019 and October 26, 2021; planning 2023 test for early December 2023. Participation in Quantum Dawn V exercises as observers.
- Progress by May 2024:
  - CSA (Derivatives Committee): On September 28, 2023 securities regulatory authorities adopted Multilateral Instrument 93-101 Derivatives: Business Conduct, with companion policy; rule comes into force on September 28, 2024; BC intends to adopt substantially similar rule later.
  - Trade Reporting Rules: CSA members preparing adoption rule amendments; on June 9, 2022 CSA published TR rules for comment and intends to publish in final form in Spring of 2024.
  - Mandatory Clearing Rules: CSA plans to publish for comment amendments to NI 94-101 in summer 2024.
  - CSA (Client focused reforms): Ongoing reviews to test compliance with KYC, KYP and suitability determination requirements; joint notice and additional guidance published; CSA and CIRO conducting compliance reviews.
  - CSA (Oversight of high-impact firms): Compliance Committee aligning registrant reviews and sharing examination schedules monthly; working on CSA-wide approach to high-impact firms.
  - CSA (Market Disruption Plan): Tests conducted October 2021 and December 2023 during CIRO’s bi-annual industry-wide BCP tests; both tests successful; Plan tested again in December 2023.

### Task the SAC with overseeing Canada-wide crisis preparedness; strengthen CDIC operational independence (MoF; SAC; DOF)
- Progress by June 2023:
  - DOF: Agencies continue to develop and maintain inter-agency contingency planning and crisis management frameworks; regular tabletop exercises conducted. No updates specified.
- Progress by May 2024:
  - No updates.

### Expand recovery planning to all deposit-taking institutions and resolution planning to those performing critical functions; valuation framework; depositor preference; strengthen resolution powers (OSFI; AMF and CDIC; DOF and Québec government)
- Progress by June 2023:
  - OSFI: All D-SIBs must have recovery plans; OSFI uses criteria to require other banks to prepare recovery plans.
  - AMF: Recovery and resolution plans for Desjardins Group continually updated; two of five deliverables for valuation framework finalized (Methodologies and Approaches; Valuation Process); third deliverable on required financial data to be approved by June 2023. Introduced depositor preference is federal purview; discussed with CDIC; no concrete action yet. AMF lacks formal power to write down shares and liabilities after December 2021 legislative amendment; Resolution Board to be formalized; joint work plan implemented.
- Progress by May 2024:
  - OSFI: Concluded that comprehensive recovery planning requirements (applying to D-SIB) will apply on a proportional basis based on systemic importance and OSFI’s internal criteria of impact and substitutability. For institutions not meeting systemic thresholds, prudential controls require tactical recovery plans per OSFI Guidelines (B-6, E-18, E-21).
  - AMF: Two-year project on implementation of valuation framework for resolution applicable to a cooperative structure finalized in November 2023. Work on depositor preference requires federal action; discussions with CDIC did not result in concrete actions. AMF believes legal framework includes necessary resolution powers per FSB recommendations; will validate practical limits and may request legislative modifications to MFQ. Resolution Board formalized with appointment of 3rd member; in operation since January 2024. Work underway to formalize backup funding.

### Operationalize emergency lending assistance (ELA) with key provinces; improve testing (BOC; British Columbia, Ontario and Québec governments)
- Progress by June 2023:
  - BoC: Undertook first ELA test draw with a provincially regulated financial institution in 2022 focusing on legal and operational preparedness to provide collateral and receive/repay funds. Maintained engagement with provincial regulators; actively engaged with ON and BC to finalize indemnity agreements (condition for PRFIs to be eligible for ELA).
  - AMF: Third iteration of the Resolution plan for Desjardins Group and 2022/26 work plan submitted to BoC in June 2022; work plan calls for meetings to operationalize ELA; simulation exercise with BoC and Desjardins Group conducted October 2022; discussions on preparatory measures to make significant assets available to be pledged quickly; intends to harmonize preparatory measures for recovery and resolution plans.
- Progress by May 2024:
  - BoC: Engaged with provinces interested in signing indemnity agreements; Bill C-59 completed second reading in the Senate by end May (would allow provincially regulated credit unions to be Payments Canada members upon Royal Assent), expanding rationale for provincial indemnity agreements.
  - AMF: Following simulation exercise, preparatory measures being implemented; AMF and Desjardins Group working on operational process, legal documentation, required authorizations; ELA testing exercises involving AMF to be held when progress appropriate.

### Further develop contingency plans for market-wide liquidity provision, particularly securities market intervention and foreign-currency liquidity provision (BOC; DOF, provincial governments)
- Progress by June 2023:
  - BOC: Routinely involved in testing Swapline facilities with major central banks; tests include trade confirmation, settlement, reversal at small nominal amounts. Drafted program terms and conditions for a US dollar repo facility should implementation be needed.
- Progress by May 2024:
  - No additional updates beyond BOC activity described.

### Expand scope of macroprudential toolkit to address lending by nonbank financial institutions and limit policy leakages (DOF)
- Progress by June 2023:
  - DOF: No update available. Majority of lending activity is federally and provincially regulated; Statistics Canada tracks size of non-prudentially regulated sector.
- Progress by May 2024:
  - No update.

### Develop prudential instruments for risks from home equity lines of credit and other risky mortgage products (DOF, OSFI)
- Progress by June 2023:
  - OSFI: June 28, 2022 supplementary Advisory to Guideline B-20 clarified treatment of innovative RESL products; reinforced LTV limits for CLPs and reverse mortgages. January 12, 2023 initial consultation on Guideline B-20 focusing on debt serviceability; B-20 review to continue over 2023-24.
  - AMF: July 2022 publicly expressed intention to review Residential Hypothecary Lending Guideline to include expectations for sound management of HELOCs and other risky mortgage products.
- Progress by May 2024:
  - AMF: February 2024 update to Residential Hypothecary Lending Guideline introduced expectations for combined loan plans, reverse hypothecary loans and hypothecary loans with shared equity features.

### Expand application of cyclical capital requirements to other deposit-taking institutions (OSFI, provincial supervisors)
- Progress by June 2023:
  - AMF: No change.
  - BOC: Undertaking eligibility and operational review for CTRF and STLF liquidity facilities, including expanding eligibility and streamlining operational process; implementing new collateral management system for increased automation and scalability.
- Progress by May 2024:
  - No further updates.

*Prepared by IMF staff based on information reported by the authorities.*

### 1. Recent data suggest some softening in the labor market. The

### 1canea2024001 - 1. Recent data suggest some softening in the labor market. The

### Labor market developments
- Unemployment rate rose to 6.4 percent in June, from 6.2 percent in May.
- Labor force participation rate showed a mild decline.
- Average hourly wage growth accelerated to 5.4 percent y/y, from 5.1 percent in May (largely reflecting base effects).
- Vacancy-unemployment ratio dropped to 0.4, reflecting declining vacancies.
- Market odds are now slightly better than even that the Bank of Canada will cut rates again at its July 24th meeting.
- Upcoming data to watch: next week’s June CPI report and business and consumer surveys.

### Domestic policy response: public consultation on Chinese EVs
- On July 2, the authorities launched a 30-day public consultation on potential policy responses to alleged “unfair Chinese trade practices” regarding electric vehicles (EVs).
- Allegations cited in the consultation notice include:
  - An “intentional, state-directed policy of overcapacity and lack of rigorous labor and environmental standards” leading to excess global supply and reduced profitability for EV producers in Canada and elsewhere.
  - Possible cyber risks and privacy concerns stemming from the technology in Chinese EVs and hybrids.
- Policy options solicited for public input include:
  - Imposing a surtax on Chinese EVs and hybrids (under Section 53 of the Customs Tariff).
  - Excluding Chinese EVs from eligibility for point-of-sale incentive programs.
  - Using the Investment Canada Act to impose “further policy guidance, monitoring, or restrictions” on Chinese investment in the Canadian EV sector.
  - Restricting the use of Chinese IT by Canadian auto manufacturers.
  - Protecting Canada’s broader EV supply chains, including steel and aluminum.
- Any decisions will be taken only after the consultation period.

### International context and trade measures
- United States action: On May 14, the United States announced that it would raise Section 301 tariffs on Chinese EVs and some hybrids to 100 percent effective August 1.
- European Union action: On June 12, the European Commission announced provisional countervailing duties of up to 38 percent starting July 4, to be finalized later in the year.
- Canadian concern: Authorities worry these measures could lead to a diversion of Chinese exports from those markets to Canada, supporting a potential Canadian response.

### EV import trends and domestic context
- Chinese EV imports to Canada rose from Can$0.8 million (0.1 percent of all EV imports) in 2018 to around Can$2.2 billion (23.1 percent of all EV imports, but still just 0.2 percent of total Canadian imports) in 2023.
- Factors cited for the increase include Tesla’s decision to move some production to China.
- Contextual factors cited by authorities:
  - Rapid consumer shift to EVs and hybrids (which already account for nearly 20 percent of new auto registrations).
  - Canada’s longstanding auto industry, skilled labor force, and endowment of critical minerals.
  - New sales of internal-combustion vehicles will be phased out by 2035.
  - A suite of incentives to support the green transition were introduced following subsidies in the US Inflation Reduction Act.
  - In the 2024 budget, the government announced a 10 percent investment tax credit to incentivize investments across major segments of the EV supply chain.
- Note: Production subsidies have also been offered to some major automakers to establish EV battery factories in Canada.

### Policy appraisal and recommendations (staff perspective)
- Any possible trade actions need to be carefully designed and should:
  - Be procedurally and methodologically transparent.
  - Be evidence-based.
  - Be WTO-consistent.
  - Be followed by intensified dialogue on cooperative solutions to address underlying concerns.
- Additional consideration: Implications of such actions for the cost of achieving Canada’s emissions-reduction goals will need to be considered carefully.

*Source: 1canea2024001 - 1. Recent data suggest some softening in the labor market. The*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1canea2024001.pdf_