## 1. A Synchronized Global Upturn and the Outlook for the United States and Canada

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### Medium-Term Prospects Tilted to the Downside
- Near-term global outlook has firmed up; momentum from 2017 expected to carry into 2018 and 2019.
- Fiscal policy stimulus in the United States accounts for half of the global growth upgrade for 2018–19.
- Global growth projections:
  - Global growth revised up to 3.9 percent for both 2018 and 2019 (0.2 of a percentage point higher than October 2017).
  - Advanced economies: 2.5 percent in 2018 and 2.2 percent in 2019 (about half a percentage point higher than previous forecasts for both years).
  - Emerging market and developing economy group: 4.9 percent for 2018 (unchanged) and 5.1 percent for 2019 (revised up by 0.1 of a percentage point).
  - China: projected to decline from 6.9 percent in 2017 to 6.4 percent in 2019 (higher by 0.1 percentage point relative to October 2017 projections).
- With revisions, output gaps in advanced economies are expected to close in 2018; advanced economies projected to grow faster than potential in 2018 and 2019.
- Headline inflation expected to pick up in 2018 due to closing output gaps and higher commodity prices.
- Medium-term global growth projected to decline to around 3.7 percent; slowdown driven by advanced economy growth moving toward subdued potential after cyclical upswing and US fiscal stimulus have run their course.
- Emerging market and developing economies expected to stabilize around current growth levels; some EMDEs (including parts of Latin America and the Caribbean) projected to grow more slowly than advanced economies in per capita terms.

### Rising Risks
- Near-term risks broadly balanced; medium-term risks skewed to the downside.
- Upside risks:
  - Stronger-than-expected advanced economy growth.
  - Potential rebound in productivity from investment recovery.
- Financial risks:
  - Sudden volatility in global equity markets (episode in early February) highlights vulnerability during gradual monetary policy normalization.
  - Markets vulnerable to an inflation surprise as output gaps turn positive; faster-than-expected inflation could force central banks to tighten more aggressively, decompression of term premiums, and rise in market volatility.
  - Continued easy financial conditions could encourage reach for yield and buildup of vulnerabilities, leaving markets exposed to sharp tightening.
- Policy and trade risks:
  - Shift toward inward-looking policies and weakened support for globalization; ongoing renegotiations of NAFTA and arrangements between the United Kingdom and the EU.
  - NAFTA-related uncertainty already weighing on investment in Canada and Mexico.
  - Recent US import restrictions and retaliatory actions pose risk of broader increases in tariff and nontariff barriers.
  - Illustrative scenario: rising protectionism in all countries leading to a 10 percent increase in import prices everywhere could lower global output and consumption by about 1¾ percent after five years.
- Other risks:
  - Changes in US tax policies expected to exacerbate income polarization.
  - Reduced migration flows could exacerbate declining labor force growth in aging societies.
  - Noneconomic risks: geopolitical tensions (East Asia, Middle East), political uncertainty in upcoming elections (including in Latin America), weak governance and systemic corruption, and more frequent extreme weather events with large humanitarian and economic losses.

### Policy Priorities: Shifting Focus to Medium-Term Objectives
- Main policy imperatives:
  - Raise growth potential and enhance inclusiveness by lifting labor productivity, increasing labor force participation, and supporting youth and displaced workers.
  - Rebuild global countercyclical buffers to better manage the next downturn.
  - Contain financial market risks to increase financial resilience.
  - Improve fiscal space to finance growth-friendly policies and put debt ratios on a downward trend.
- Fiscal policy guidance:
  - Focus on medium-term objectives, including infrastructure investment to boost potential output, while ensuring public debt dynamics are sustainable and buffers are rebuilt.
  - Calibrate fiscal consolidation to avoid sharp drags on growth where consolidation is needed.
- Monetary and structural guidance for EMDEs:
  - Improved monetary policy frameworks have lowered core inflation, providing scope to use monetary policy to support demand if activity weakens.
  - Governance reforms and economic diversification (especially in commodity exporters) to lift private investment, create jobs, and expand activities beyond primary resource sectors.

### United States Outlook: Above-Potential Growth with Higher Risks
- 2017 performance:
  - Seasonally adjusted annual real GDP grew by slightly over 3 percent in 2017:Q2 and 2017:Q3; 2017:Q4 at 2.5 percent.
  - Annual growth for 2017 was 2.3 percent (up from 1.5 percent in 2016).
  - Core personal consumption expenditure inflation at 1.5 percent (below the Federal Reserve’s 2 percent target).
  - Average hourly earnings up 2.5 percent over the past 12 months.
- Projections and fiscal stimulus effects:
  - Policy stimulus from the Tax Cuts and Jobs Act (TCJA) and the 2018 two-year bipartisan budget agreement expected to boost GDP levels in next two years.
  - Economic activity projected to expand by 2.9 percent in 2018 and 2.7 percent in 2019 (up by 0.6 and 0.8 of a percentage point, respectively, compared to October 2017 WEO forecasts).
  - Beyond near term, growth expected to be lower from 2022 onward due to increased fiscal deficit requiring future adjustment and temporary nature of some provisions.
  - Inflation expected to rise to 1.9 percent by end-2018 and modestly overshoot the Federal Reserve’s target in 2019.
- External and fiscal balances:
  - Current account deficit projected to deteriorate to 2.9 percent of GDP in 2018, peaking at 3.6 percent of GDP in 2020.
  - General government debt projected to rise to 110 percent of GDP by 2020 due to aging-related expenditure pressures, revenue loss from the tax reform, and the latest budget.

### US Policy Mix and Risks
- Fiscal policy:
  - TCJA features temporary cuts in the personal income tax and significant and permanent cuts in the corporate income tax.
  - Two-year budget bill increases spending authority by $300 billion over the next two years.
  - Primary structural general government balance estimated to weaken from –2.5 percent in 2017 to –3.9 percent of potential GDP by 2019.
  - Tax reform will lead to revenue losses and increase federal debt by about 5 percentage points of GDP in the next five years.
  - After 2021, fiscal stimulus expected to move into reverse, acting as a drag on the economy.
- Monetary policy:
  - US economy operating above potential could require faster-than-expected monetary tightening, raising term premiums and debt service costs.
  - March 2018: Federal Open Market Committee raised federal funds rate target range by 25 basis points to 1½ to 1¾ percent.
  - Federal Reserve gradual balance sheet normalization proceeding as planned; Fed remains active in Treasury and mortgage-backed securities markets while stepping up balance sheet reduction toward end of year and into 2019.
- Increased upside and downside risks from the policy mix:
  - Fiscal stimulus at full employment heightens inflation surprise risk, potentially prompting faster Fed tightening, stronger US dollar, lower equity prices, and larger decompression of term premiums.
  - Medium-term risk: withdrawal of stimulus when policy rates are likely above neutral could trigger a sharper-than-expected slowdown with global spillovers.

### Uncertainties in US Policy Areas
- Financial deregulation:
  - Congressional proposals aim to roll back some Dodd-Frank provisions; risks from materially weakening oversight, especially for large systemic banks, could rebuild financial stability risks.
- Trade policy:
  - Ongoing NAFTA renegotiations; a disorderly withdrawal from NAFTA would weaken the US economy, causing job losses and lower potential growth.
  - Recent trade measures: safeguards on washing machines and solar panels, proposed tariffs on steel and aluminum, and announced trade actions over China’s intellectual property practices.
  - Worsening trade tensions and broader barriers would directly reduce economic activity and weaken confidence.
- Immigration policy:
  - Immigrants constitute around 14 percent of the US population and 17 percent of the US workforce.
  - Interruptions to inflows would reduce US workforce growth and weigh on growth, particularly with the economy near full employment.

### US Policy Priorities
- Address revenue losses from TCJA and stabilize public finances by:
  - Implementing policies to raise indirect taxes and gradually curb expenditure to finance spending on infrastructure, education and skill development, and family-friendly benefits.
  - Ensuring a steady decline in the general government deficit and public debt-to-GDP ratio over the medium term.
- Preserve strengthened financial oversight:
  - Strengthen the regulatory system in housing finance and insurance supervision while preserving the risk-based approach to regulation, supervision, and resolution.
- Structural policies to raise potential and inclusiveness:
  - Improve educational opportunities and outcomes.
  - Protect gains in health care coverage and contain health care cost inflation.
  - Maintain a free, fair, and mutually beneficial trade and investment regime.
  - Complementary measures: childcare support for low- and middle-income families, paid family leave, expanded earned income tax credit, increased federal minimum wage, and better social assistance programs.
  - Skills-based immigration reform to meet demand for skilled labor, enhance labor productivity, lift potential growth, and ameliorate medium-term fiscal imbalances from population aging.

### Canada: 2017 Performance, Risks, and Policy Priorities
- Growth and demand in 2017:
  - The economy grew by 3 percent in 2017, notwithstanding some moderation in the second half, supported by accommodative fiscal and monetary policies, a strong US economy, and higher oil prices.
  - Private consumption:
    - Has been strong, particularly for the first three quarters, supported by gains in disposable income.
    - Fiscal transfers contributed to the initial boost in incomes; more recent increases are the result of a strengthening labor market.
    - The employment rate has increased steadily, and the unemployment rate has fallen to its lowest level in 40 years.
  - Other demand components:
    - Business investment grew for the first time since 2014, but recovery has been moderate; investment in the oil sector hampered by relatively low oil prices.
    - Export growth picked up in the first half of 2017 but has since stopped growing.
    - Residential investment accelerated in Q4 2017 ahead of the tightening of residential mortgage underwriting guidelines (in January 2018), but the underlying trend has slowed because of higher mortgage interest rates, tighter macroprudential policies, and new tax measures.
- Inflation developments:
  - Inflation has been rising, consistent with a closing output gap.
  - After decelerating toward the lower bound of the Bank of Canada’s target range (1–3 percent) in mid-2017, all three core CPI inflation measures (CPI-trim, CPI-median, and CPI-common) and headline inflation have recovered and currently hover around 2 percent, the midpoint of the target range.
- Near-term outlook and projections:
  - GDP growth is expected to moderate to 2.1 percent in 2018 and 2 percent in 2019, above the economy’s medium-term potential.
  - Higher interest rates are expected to slow private consumption as debt service costs rise and, combined with tighter macroprudential policies, continue to dampen residential investment.
  - A stronger US economy will provide support to demand for Canada’s exports and investment in the export sector.
  - Medium-term growth constrained by weak external competitiveness, sluggish labor productivity growth, and population aging, limiting growth to about 1¾ percent (medium term), significantly lower than the recent average of 2.6 percent (over 2000–08).
  - US policy risks (tax and trade) cloud Canada’s medium-term prospects.
- Implications of US tax reform and NAFTA negotiations:
  - US tax reform (TCJA) is expected to temporarily boost Canada’s near-term growth by around 0.2 to 0.3 percentage point.
  - Over the medium term, a lower tax burden on business investment in the United States could make the United States a more attractive investment location, negatively affecting investment and growth in Canada.
  - NAFTA negotiations:
    - Preliminary progress claimed on modernizing NAFTA for digital and e-commerce trade.
    - US proposals (minimum US content requirements, eliminating dispute resolution, cap on government procurement, five-year sunset clause) are major points of contention.
    - Early March US intentions to impose tariffs on steel and aluminum intensified trade tensions; Canada later was announced to be exempt conditional on a NAFTA deal.
    - NAFTA uncertainty is already weighing on investment in Canada; failure to forge a new agreement could impact investment for a more prolonged period.
- Housing market vulnerabilities and financial risks:
  - Household debt as a percentage of disposable income reached a historic high of 173 percent at the end of 2017.
  - Banking system sound with high profitability, but banks’ exposures to households are substantial (about one-third of bank assets).
  - Financial stability risks could emerge if a sharp correction in the housing market occurs together with a sharp and persistent rise in unemployment.
  - Regional housing dynamics:
    - Vancouver: federal macroprudential policies and a provincial tax on nonresident home buyers (introduced August 2016) contributed to a softening, with house prices falling about 3½ percent between August and December 2016; price pressures reemerged and house prices grew by about 16 percent in 2017.
    - Toronto: house prices have fallen since mid-2017. Ontario’s Fair Housing Plan (April 2017), including a 15 percent tax on nonresident home buyers, together with changes in federal mortgage insurance rules, dampened market sentiment and contributed to a decline in house prices.
  - Mortgage risk characteristics:
    - Following the introduction of a stress test for insured mortgages in late 2016, high loan-to-value-ratio mortgages dropped by about 5½ percent in 2017.
    - Growth of low loan-to-value-ratio mortgages accelerated to about 17 percent in 2017.
    - Concern that low loan-to-value-ratio mortgages have increasingly been taken by households with higher levels of risk:
      - Share of low-ratio mortgages with loan-to-income ratios greater than 450 percent rose to 32 percent in 2016 (most recent data available), up from 23 percent in 2014.
      - About 30 percent of these loans are to younger households (under 35 years old).
      - 44 percent are loans to the lowest-income households.
- Policy response on underwriting (effective January 2018) includes:
  - Restrictions on borrowing from multiple sources.
  - Stringent requirements for measurement of loan-to-value ratios taking account of housing market risks (for example, price risks).
  - Introduction of a stress test for noninsured mortgages (analogous to that for insured mortgages introduced in late 2016).
  - Federally regulated financial institutions must set the qualifying rate for noninsured mortgages at the greater of the contractual mortgage rate plus 2 percentage points or the five-year benchmark rate published by the Bank of Canada.
- Policy priorities and fiscal stance:
  - Given elevated uncertainty from US tax and trade policies, macroeconomic policies in Canada should be tightened only gradually.
  - The Bank of Canada has raised the policy rate three times since July 2017 (by 75 basis points to 1.25 percent).
  - IMF staff projects a gradual increase of the policy rate toward its neutral level (around 3 percent) over the projection horizon.
  - Fiscal policy:
    - No additional fiscal stimulus would be warranted.
    - The federal government should start rebuilding fiscal buffers now, at a gradual pace, as envisaged in the 2018 budget.
    - Provincial plans:
      - Quebec and British Columbia expected to broadly maintain balanced operational budget positions.
      - Alberta expected to step up efforts to reduce deficits.
      - Ontario is on course for an operating budget surplus in fiscal year 2017/18 but announced intention in its 2018 budget to run a deficit of about ¾ percent of Ontario’s GDP over the next three fiscal years.
  - In the financial sector, authorities should hold off on additional macroprudential measures for now until the effects of recent measures are known.
  - Supply-side measures to address housing market constraints may be warranted, including:
    - Review of zoning and density policies.
    - Review of approval processes for new developments.
    - Enhancement of urban transit systems.
- Structural reform priorities:
  - Structural reforms are vital to boost competitiveness and medium-term growth.
  - Authorities implementing an ambitious agenda covering internal and external trade, innovation, immigration, and female labor participation.
  - Immediate priorities include:
    - A holistic review of the overall tax system to assess scope for improving tax efficiency while maintaining Canada’s tax competitiveness before major tax reforms.
    - Make infrastructure investment more timely and efficient: consolidate project plans across governments and expand use of common standards of project evaluation.
    - Accelerate implementation of the Canadian Free Trade Agreement (entered into force July 2017) to reduce barriers to internal trade, investment, and labor mobility.
    - Reduce foreign direct investment restrictions and regulatory barriers to entry in key sectors.
    - Continue diversifying trade patterns: Comprehensive Economic Trade Agreement with the EU (entered into force September 2017) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to enhance ties with Asian economies.

### Box 1.1 — The US Tax Cuts and Jobs Act: key features and spillovers
- Corporate tax changes:
  - Statutory corporate income tax rate reduced from 35 to 21 percent.
  - Temporary capital expensing: full deduction of certain capital investments until 2023, with gradual phaseout by 2027.
  - Interest deduction capped at 30 percent of EBITDA until 2022, and 30 percent of EBIT thereafter (unused deductions can be carried forward).
  - Pass-through entities receive a 20 percent exemption on their incomes before individual rates apply.
  - International provisions move the United States toward a territorial system with guardrails:
    - One-time repatriation tax: cash and cash equivalents taxed at 15.5 percent and other assets at 8 percent, payable over eight years.
    - Foreign-derived intangible income (FDII) effective tax rate of 13.125 percent (16.4 percent after 2025).
    - Global intangible low-taxed income (GILTI) effective tax rate of 10.5 percent (rising to 13.125 percent after 2025).
    - Base erosion anti-abuse tax (BEAT) imposing a minimum 10 percent tax (12.5 percent after 2025) on certain payments to foreign affiliates.
- Personal income tax changes:
  - Lower marginal tax rates; top rate falls from 39.6 to 37 percent.
  - Temporary measures: all personal income tax measures sunset after 2025.
  - Standard deduction roughly doubled (from $13,000 to $24,000 for joint filers); many individual exemptions and itemized deductions eliminated.
  - Child tax credit increased from $1,000 to $2,000.
  - Alternative minimum tax scaled back (individuals affected reduced from 5 million to 200,000).
  - Estate tax exemption doubled to $11.2 million a person.
- Macroeconomic and international effects:
  - Corporate tax reform reduces certain distortions, may accelerate investment (timing distortion from temporary expensing) and reduce profit shifting offshore; some provisions add complexity.
  - Changes to personal taxes increase disposable income in the short run and may increase income inequality.
  - The US tax policy changes are estimated to have a positive effect on US real GDP cumulating to 1.2 percent through 2020 (with uncertainty).
  - Direct international spillovers limited and concentrated in low-tax jurisdictions with large US multinational investment; demand spillovers more important for close trading partners such as Canada and Mexico.
  - Reduced US corporate tax rates could place downward pressure on corporate tax rates elsewhere as countries compete to protect tax bases and attract investment; FDII may intensify tax competition despite GILTI.

*International Monetary Fund | April 2018 — Chapter: 1. A Synchronized Global Upturn and the Outlook for the United States and Canada*

### 1. A Synchronized Global Upturn and the

### 1. A Synchronized Global Upturn and the Outlook for the United States and Canada

### Medium-Term Prospects Tilted to the Downside
- Near-term global outlook has firmed up; momentum from 2017 expected to carry into 2018 and 2019.
- Fiscal policy stimulus in the United States accounts for half of the global growth upgrade for 2018–19.
- Global growth projections:
  - Global growth revised up to 3.9 percent for both 2018 and 2019 (0.2 of a percentage point higher than October 2017).
  - Advanced economies: 2.5 percent in 2018 and 2.2 percent in 2019 (about half a percentage point higher than previous forecasts for both years).
  - Emerging market and developing economy group: 4.9 percent for 2018 (unchanged) and 5.1 percent for 2019 (revised up by 0.1 of a percentage point).
  - China: projected to decline from 6.9 percent in 2017 to 6.4 percent in 2019 (higher by 0.1 percentage point relative to October 2017 projections).
- With revisions, output gaps in advanced economies are expected to close in 2018; advanced economies projected to grow faster than potential in 2018 and 2019.
- Headline inflation expected to pick up in 2018 due to closing output gaps and higher commodity prices.
- Medium-term global growth projected to decline to around 3.7 percent; slowdown driven by advanced economy growth moving toward subdued potential after cyclical upswing and US fiscal stimulus have run their course.
- Emerging market and developing economies expected to stabilize around current growth levels; some EMDEs (including parts of Latin America and the Caribbean) projected to grow more slowly than advanced economies in per capita terms.

### Rising Risks
- Near-term risks broadly balanced; medium-term risks skewed to the downside.
- Upside risks:
  - Stronger-than-expected advanced economy growth.
  - Potential rebound in productivity from investment recovery.
- Financial risks:
  - Sudden volatility in global equity markets (episode in early February) highlights vulnerability during gradual monetary policy normalization.
  - Markets vulnerable to an inflation surprise as output gaps turn positive; faster-than-expected inflation could force central banks to tighten more aggressively, decompression of term premiums, and rise in market volatility.
  - Continued easy financial conditions could encourage reach for yield and buildup of vulnerabilities, leaving markets exposed to sharp tightening.
- Policy and trade risks:
  - Shift toward inward-looking policies and weakened support for globalization; ongoing renegotiations of NAFTA and arrangements between the United Kingdom and the EU.
  - NAFTA-related uncertainty already weighing on investment in Canada and Mexico.
  - Recent US import restrictions and retaliatory actions pose risk of broader increases in tariff and nontariff barriers.
  - Illustrative scenario: rising protectionism in all countries leading to a 10 percent increase in import prices everywhere could lower global output and consumption by about 1¾ percent after five years.
- Other risks:
  - Changes in US tax policies expected to exacerbate income polarization.
  - Reduced migration flows could exacerbate declining labor force growth in aging societies.
  - Noneconomic risks: geopolitical tensions (East Asia, Middle East), political uncertainty in upcoming elections (including in Latin America), weak governance and systemic corruption, and more frequent extreme weather events with large humanitarian and economic losses.

### Policy Priorities: Shifting Focus to Medium-Term Objectives
- Main policy imperatives:
  - Raise growth potential and enhance inclusiveness by lifting labor productivity, increasing labor force participation, and supporting youth and displaced workers.
  - Rebuild global countercyclical buffers to better manage the next downturn.
  - Contain financial market risks to increase financial resilience.
  - Improve fiscal space to finance growth-friendly policies and put debt ratios on a downward trend.
- Fiscal policy guidance:
  - Focus on medium-term objectives, including infrastructure investment to boost potential output, while ensuring public debt dynamics are sustainable and buffers are rebuilt.
  - Calibrate fiscal consolidation to avoid sharp drags on growth where consolidation is needed.
- Monetary and structural guidance for EMDEs:
  - Improved monetary policy frameworks have lowered core inflation, providing scope to use monetary policy to support demand if activity weakens.
  - Governance reforms and economic diversification (especially in commodity exporters) to lift private investment, create jobs, and expand activities beyond primary resource sectors.

### United States Outlook: Above-Potential Growth with Higher Risks
- 2017 performance:
  - Seasonally adjusted annual real GDP grew by slightly over 3 percent in 2017:Q2 and 2017:Q3; 2017:Q4 at 2.5 percent.
  - Annual growth for 2017 was 2.3 percent (up from 1.5 percent in 2016).
  - Core personal consumption expenditure inflation at 1.5 percent (below the Federal Reserve’s 2 percent target).
  - Average hourly earnings up 2.5 percent over the past 12 months.
- Projections and fiscal stimulus effects:
  - Policy stimulus from the Tax Cuts and Jobs Act (TCJA) and the 2018 two-year bipartisan budget agreement expected to boost GDP levels in next two years.
  - Economic activity projected to expand by 2.9 percent in 2018 and 2.7 percent in 2019 (up by 0.6 and 0.8 of a percentage point, respectively, compared to October 2017 WEO forecasts).
  - Beyond near term, growth expected to be lower from 2022 onward due to increased fiscal deficit requiring future adjustment and temporary nature of some provisions.
  - Inflation expected to rise to 1.9 percent by end-2018 and modestly overshoot the Federal Reserve’s target in 2019.
- External and fiscal balances:
  - Current account deficit projected to deteriorate to 2.9 percent of GDP in 2018, peaking at 3.6 percent of GDP in 2020.
  - General government debt projected to rise to 110 percent of GDP by 2020 due to aging-related expenditure pressures, revenue loss from the tax reform, and the latest budget.

### US Policy Mix and Risks
- Fiscal policy:
  - TCJA features temporary cuts in the personal income tax and significant and permanent cuts in the corporate income tax.
  - Two-year budget bill increases spending authority by $300 billion over the next two years.
  - Primary structural general government balance estimated to weaken from –2.5 percent in 2017 to –3.9 percent of potential GDP by 2019.
  - Tax reform will lead to revenue losses and increase federal debt by about 5 percentage points of GDP in the next five years.
  - After 2021, fiscal stimulus expected to move into reverse, acting as a drag on the economy.
- Monetary policy:
  - US economy operating above potential could require faster-than-expected monetary tightening, raising term premiums and debt service costs.
  - March 2018: Federal Open Market Committee raised federal funds rate target range by 25 basis points to 1½ to 1¾ percent.
  - Federal Reserve gradual balance sheet normalization proceeding as planned; Fed remains active in Treasury and mortgage-backed securities markets while stepping up balance sheet reduction toward end of year and into 2019.
- Increased upside and downside risks from the policy mix:
  - Fiscal stimulus at full employment heightens inflation surprise risk, potentially prompting faster Fed tightening, stronger US dollar, lower equity prices, and larger decompression of term premiums.
  - Medium-term risk: withdrawal of stimulus when policy rates are likely above neutral could trigger a sharper-than-expected slowdown with global spillovers.

### Uncertainties in US Policy Areas
- Financial deregulation:
  - Congressional proposals aim to roll back some Dodd-Frank provisions; risks from materially weakening oversight, especially for large systemic banks, could rebuild financial stability risks.
- Trade policy:
  - Ongoing NAFTA renegotiations; a disorderly withdrawal from NAFTA would weaken the US economy, causing job losses and lower potential growth.
  - Recent trade measures: safeguards on washing machines and solar panels, proposed tariffs on steel and aluminum, and announced trade actions over China’s intellectual property practices.
  - Worsening trade tensions and broader barriers would directly reduce economic activity and weaken confidence.
- Immigration policy:
  - Immigrants constitute around 14 percent of the US population and 17 percent of the US workforce.
  - Interruptions to inflows would reduce US workforce growth and weigh on growth, particularly with the economy near full employment.

### US Policy Priorities
- Address revenue losses from TCJA and stabilize public finances by:
  - Implementing policies to raise indirect taxes and gradually curb expenditure to finance spending on infrastructure, education and skill development, and family-friendly benefits.
  - Ensuring a steady decline in the general government deficit and public debt-to-GDP ratio over the medium term.
- Preserve strengthened financial oversight:
  - Strengthen the regulatory system in housing finance and insurance supervision while preserving the risk-based approach to regulation, supervision, and resolution.
- Structural policies to raise potential and inclusiveness:
  - Improve educational opportunities and outcomes.
  - Protect gains in health care coverage and contain health care cost inflation.
  - Maintain a free, fair, and mutually beneficial trade and investment regime.
  - Complementary measures: childcare support for low- and middle-income families, paid family leave, expanded earned income tax credit, increased federal minimum wage, and better social assistance programs.
  - Skills-based immigration reform to meet demand for skilled labor, enhance labor productivity, lift potential growth, and ameliorate medium-term fiscal imbalances from population aging.

### Canada: Back on a Steady Growth Path
- (Section begins: "Canada recorded the highest growth rate among Group of Seven (G7) economies in" — content beyond this opening line not included in the supplied excerpt.)

*International Monetary Fund | April 2018 — Chapter: 1. A Synchronized Global Upturn and the Outlook for the United States and Canada*

### 2017. The economy grew by 3 percent in 2017,

### Canada: 2017 Performance, Risks, and Policy Priorities (wreo0518-chp1)

### Growth and demand in 2017
- The economy grew by 3 percent in 2017, notwithstanding some moderation in the second half, supported by accommodative fiscal and monetary policies, a strong US economy, and higher oil prices.
- Private consumption:
  - Has been strong, particularly for the first three quarters, supported by gains in disposable income.
  - Fiscal transfers contributed to the initial boost in incomes; more recent increases are the result of a strengthening labor market.
  - The employment rate has increased steadily, and the unemployment rate has fallen to its lowest level in 40 years.
- Other demand components:
  - Business investment grew for the first time since 2014, but recovery has been moderate; investment in the oil sector hampered by relatively low oil prices.
  - Export growth picked up in the first half of 2017 but has since stopped growing.
  - Residential investment accelerated in Q4 2017 ahead of the tightening of residential mortgage underwriting guidelines (in January 2018), but the underlying trend has slowed because of higher mortgage interest rates, tighter macroprudential policies, and new tax measures.

### Inflation developments
- Inflation has been rising, consistent with a closing output gap.
- After decelerating toward the lower bound of the Bank of Canada’s target range (1–3 percent) in mid-2017, all three core CPI inflation measures (CPI-trim, CPI-median, and CPI-common) and headline inflation have recovered and currently hover around 2 percent, the midpoint of the target range.

### Near-term outlook and projections
- GDP growth is expected to moderate to 2.1 percent in 2018 and 2 percent in 2019, above the economy’s medium-term potential.
- Higher interest rates are expected to slow private consumption as debt service costs rise and, combined with tighter macroprudential policies, continue to dampen residential investment.
- A stronger US economy will provide support to demand for Canada’s exports and investment in the export sector.
- Medium-term growth constrained by weak external competitiveness, sluggish labor productivity growth, and population aging, limiting growth to about 1¾ percent (medium term), significantly lower than the recent average of 2.6 percent (over 2000–08).
- US policy risks (tax and trade) cloud Canada’s medium-term prospects.

### Implications of US tax reform and NAFTA negotiations
- US tax reform (TCJA) is expected to temporarily boost Canada’s near-term growth by around 0.2 to 0.3 percentage point.
- Over the medium term, a lower tax burden on business investment in the United States could make the United States a more attractive investment location, negatively affecting investment and growth in Canada.
- NAFTA negotiations:
  - Preliminary progress claimed on modernizing NAFTA for digital and e-commerce trade.
  - US proposals (minimum US content requirements, eliminating dispute resolution, cap on government procurement, five-year sunset clause) are major points of contention.
  - Early March US intentions to impose tariffs on steel and aluminum intensified trade tensions; Canada later was announced to be exempt conditional on a NAFTA deal.
  - NAFTA uncertainty is already weighing on investment in Canada; failure to forge a new agreement could impact investment for a more prolonged period.

### Housing market vulnerabilities and financial risks
- Household debt as a percentage of disposable income reached a historic high of 173 percent at the end of 2017.
- Banking system sound with high profitability, but banks’ exposures to households are substantial (about one-third of bank assets).
- Financial stability risks could emerge if a sharp correction in the housing market occurs together with a sharp and persistent rise in unemployment.
- Regional housing dynamics:
  - Vancouver: federal macroprudential policies and a provincial tax on nonresident home buyers (introduced August 2016) contributed to a softening, with house prices falling about 3½ percent between August and December 2016; price pressures reemerged and house prices grew by about 16 percent in 2017.
  - Toronto: house prices have fallen since mid-2017. Ontario’s Fair Housing Plan (April 2017), including a 15 percent tax on nonresident home buyers, together with changes in federal mortgage insurance rules, dampened market sentiment and contributed to a decline in house prices.
- Mortgage risk characteristics:
  - Following the introduction of a stress test for insured mortgages in late 2016, high loan-to-value-ratio mortgages dropped by about 5½ percent in 2017.
  - Growth of low loan-to-value-ratio mortgages accelerated to about 17 percent in 2017.
  - Concern that low loan-to-value-ratio mortgages have increasingly been taken by households with higher levels of risk:
    - Share of low-ratio mortgages with loan-to-income ratios greater than 450 percent rose to 32 percent in 2016 (most recent data available), up from 23 percent in 2014.
    - About 30 percent of these loans are to younger households (under 35 years old).
    - 44 percent are loans to the lowest-income households.
- Policy response on underwriting (effective January 2018) includes:
  - Restrictions on borrowing from multiple sources.
  - Stringent requirements for measurement of loan-to-value ratios taking account of housing market risks (for example, price risks).
  - Introduction of a stress test for noninsured mortgages (analogous to that for insured mortgages introduced in late 2016).
- Federally regulated financial institutions must set the qualifying rate for noninsured mortgages at the greater of the contractual mortgage rate plus 2 percentage points or the five-year benchmark rate published by the Bank of Canada.

### Policy priorities and fiscal stance
- Given elevated uncertainty from US tax and trade policies, macroeconomic policies in Canada should be tightened only gradually.
- The Bank of Canada has raised the policy rate three times since July 2017 (by 75 basis points to 1.25 percent).
- IMF staff projects a gradual increase of the policy rate toward its neutral level (around 3 percent) over the projection horizon.
- Fiscal policy:
  - No additional fiscal stimulus would be warranted.
  - The federal government should start rebuilding fiscal buffers now, at a gradual pace, as envisaged in the 2018 budget.
  - Provincial plans:
    - Quebec and British Columbia expected to broadly maintain balanced operational budget positions.
    - Alberta expected to step up efforts to reduce deficits.
    - Ontario is on course for an operating budget surplus in fiscal year 2017/18 but announced intention in its 2018 budget to run a deficit of about ¾ percent of Ontario’s GDP over the next three fiscal years.
- In the financial sector, authorities should hold off on additional macroprudential measures for now until the effects of recent measures are known.
- Supply-side measures to address housing market constraints may be warranted, including:
  - Review of zoning and density policies.
  - Review of approval processes for new developments.
  - Enhancement of urban transit systems.

### Structural reform priorities
- Structural reforms are vital to boost competitiveness and medium-term growth.
- Authorities implementing an ambitious agenda covering internal and external trade, innovation, immigration, and female labor participation.
- Immediate priorities include:
  - A holistic review of the overall tax system to assess scope for improving tax efficiency while maintaining Canada’s tax competitiveness before major tax reforms.
  - Make infrastructure investment more timely and efficient: consolidate project plans across governments and expand use of common standards of project evaluation.
  - Accelerate implementation of the Canadian Free Trade Agreement (entered into force July 2017) to reduce barriers to internal trade, investment, and labor mobility.
  - Reduce foreign direct investment restrictions and regulatory barriers to entry in key sectors.
  - Continue diversifying trade patterns: Comprehensive Economic Trade Agreement with the EU (entered into force September 2017) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to enhance ties with Asian economies.

### Box 1.1 — The US Tax Cuts and Jobs Act: key features and spillovers
- Corporate tax changes:
  - Statutory corporate income tax rate reduced from 35 to 21 percent.
  - Temporary capital expensing: full deduction of certain capital investments until 2023, with gradual phaseout by 2027.
  - Interest deduction capped at 30 percent of EBITDA until 2022, and 30 percent of EBIT thereafter (unused deductions can be carried forward).
  - Pass-through entities receive a 20 percent exemption on their incomes before individual rates apply.
  - International provisions move the United States toward a territorial system with guardrails:
    - One-time repatriation tax: cash and cash equivalents taxed at 15.5 percent and other assets at 8 percent, payable over eight years.
    - Foreign-derived intangible income (FDII) effective tax rate of 13.125 percent (16.4 percent after 2025).
    - Global intangible low-taxed income (GILTI) effective tax rate of 10.5 percent (rising to 13.125 percent after 2025).
    - Base erosion anti-abuse tax (BEAT) imposing a minimum 10 percent tax (12.5 percent after 2025) on certain payments to foreign affiliates.
- Personal income tax changes:
  - Lower marginal tax rates; top rate falls from 39.6 to 37 percent.
  - Temporary measures: all personal income tax measures sunset after 2025.
  - Standard deduction roughly doubled (from $13,000 to $24,000 for joint filers); many individual exemptions and itemized deductions eliminated.
  - Child tax credit increased from $1,000 to $2,000.
  - Alternative minimum tax scaled back (individuals affected reduced from 5 million to 200,000).
  - Estate tax exemption doubled to $11.2 million a person.
- Macroeconomic and international effects:
  - Corporate tax reform reduces certain distortions, may accelerate investment (timing distortion from temporary expensing) and reduce profit shifting offshore; some provisions add complexity.
  - Changes to personal taxes increase disposable income in the short run and may increase income inequality.
  - The US tax policy changes are estimated to have a positive effect on US real GDP cumulating to 1.2 percent through 2020 (with uncertainty).
  - Direct international spillovers limited and concentrated in low-tax jurisdictions with large US multinational investment; demand spillovers more important for close trading partners such as Canada and Mexico.
  - Reduced US corporate tax rates could place downward pressure on corporate tax rates elsewhere as countries compete to protect tax bases and attract investment; FDII may intensify tax competition despite GILTI.

*International Monetary Fund | April 2018 — wreo0518-chp1*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2018/may/wreo0518-chp1.pdf_