IMF Executive Board Concludes 2018 Article IV Consultation with Canada
IMF News, July 16, 2018
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- Published: July 16, 2018
Overview
- Date: July 16, 2018
- Focus: Policies to secure stronger, inclusive, and self-sustaining growth.
- Context: Economy performing well with robust growth; housing market showing signs of cooling following macroprudential measures and monetary tightening. Elevated economic anxiety due to trade tensions, NAFTA negotiation uncertainty, and the impact of the U.S Tax Cuts and Jobs Act on Canada’s medium-term competitiveness.
Economic outlook and risks
- Near-term growth:
- Real GDP is projected to moderate to about 2 percent in 2018 and 2.0 percent in 2019.
- A fast-growing U.S. economy is expected to provide a near term boost to Canadian exports and contribute to a narrowing of the current account deficit.
- Medium-term constraints:
- Potential growth is expected to be about 1¾ percent, constrained by weak external competitiveness, sluggish labor productivity growth, and population aging.
- Key downside risks:
- Domestic: A sharp correction in the housing market that, if accompanied by higher unemployment and a sharp contraction in private consumption, could pose risks to financial stability and growth.
- External: Impact of U.S. tax reform on Canada’s medium-term competitiveness, uncertainty related to NAFTA negotiations, and prospect of further escalation in trade tensions. These risks can be mutually reinforcing.
- Policy implication: Policy choices will be crucial to shape the outlook and mitigate risks.
Executive Board assessment — findings and recommendations
- General assessment:
- Directors commended the impressive performance of the Canadian economy in 2017 and noted that growth momentum is expected to continue in the near term, but with significant downside risks.
- Directors urged authorities to rebuild policy buffers and advance reforms to boost competitiveness and productivity.
- Fiscal policy:
- With output above potential, the focus should be on rebuilding fiscal buffers.
- Provinces running high deficits or debt should lead necessary fiscal adjustment.
- Directors welcomed the federal government’s commitment to set federal debt‑to‑GDP on a declining path and noted that planned consolidation could be frontloaded to take advantage of favorable economic performance.
- Recommendation to strengthen fiscal framework credibility by explicitly incorporating fiscal rules, though a few Directors questioned the timing given current conjuncture.
- If downside risks materialize, automatic stabilizers should operate fully and discretionary measures could be deployed.
- Tax policy:
- The overall impact of recent U.S. tax reform needs full study and assessment.
- Many Directors suggested a review of Canada’s tax system to evaluate scope for improving efficiency while maintaining competitiveness.
- Directors cautioned against hasty reactions to recent developments; implications of potential tax changes should be carefully considered.
- Monetary policy:
- Monetary stance broadly appropriate; inflation is well contained.
- Tightening cycle should proceed with caution and be guided by incoming data on economic activity given elevated uncertainty.
- Macroprudential and housing:
- Current macroprudential measures are appropriate and appear to have contributed to cooling in the housing market.
- If housing vulnerabilities continue to rise, authorities should consider introducing additional measures.
- Supply‑side policies are needed to address housing affordability concerns and reduce demand pressures.
- Financial stability and regulation:
- Importance of close coordination and information exchange between federal and provincial regulators to mitigate financial stability risks.
- Gaps identified in the AML/CFT assessment will need to be addressed.
- Directors looked forward to the upcoming FSAP for a comprehensive assessment of the financial sector.
- Trade and external relations:
- Directors urged Canada and its NAFTA partners to continue constructive negotiations to reach an agreement that opens trade and promotes competition.
- Directors commended signing of the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership and urged prompt ratification.
- Structural reforms to boost productivity:
- Revitalizing productivity is key to boosting long‑term growth.
- Recommended measures: reduce barriers to inter‑provincial trade, facilitate infrastructure investment, and further deregulate product markets to attract FDI.
- Emphasis on coordination between federal and provincial authorities for implementation.
Key economic indicators (Percentage change, unless otherwise indicated)
- Real GDP:
- 2014: 2.9
- 2015: 1.0
- 2016: 1.4
- 2017: 3.0
- 2018 (projection): 2.1
- 2019 (projection): 2.0
- Total domestic demand:
- 2014: 1.8
- 2015: 0.1
- 2016: 0.9
- 2017: 3.8
- 2018 (projection): 3.2
- 2019 (projection): 1.3
- Private consumption:
- 2014: 2.6
- 2015: 2.2
- 2016: 2.3
- 2017: 3.4
- Total investment:
- 2014: -5.9
- 2015: -3.9
- 2016: 6.4
- 2017: 7.6
- Net exports, contribution to growth:
- 2014: 1.1
- 2015: 0.7
- 2016: -0.9
- 2017: -0.6
- Unemployment rate (average) 2/:
- 2014: 6.9
- 2015: 7.0
- 2016: 6.3
- 2017: 6.1
- 2018 (projection): 6.2
- CPI inflation (average):
- 2014: 1.9
- 2015: 1.6
- 2016: 2.5
- Gross national saving (Percent of GDP) 1/:
- 2014: 22.5
- 2015: 20.5
- 2016: 20.0
- 2017: 20.8
- 2018 (projection): 20.9
- 2019 (projection): 21.9
- Gross domestic investment (Percent of GDP):
- 2014: 24.9
- 2015: 24.1
- 2016: 23.2
- 2017: 23.7
- 2018 (projection): 23.8
- 2019 (projection): 23.9
- General Government Fiscal Indicators 1/ (NA basis):
- Revenue:
- 2014: 38.6
- 2015: 39.8
- 2016: 39.6
- 2017: 39.2
- Expenditures:
- 2014: 38.5
- 2015: 39.9
- 2016: 40.7
- 2017: 40.3
- 2018 (projection): 40.4
- Overall balance:
- 2014: 0.2
- 2015: -0.1
- 2016: -1.1
- 2017: -1.2
- Gross Debt:
- 2014: 85.0
- 2015: 90.5
- 2016: 91.1
- 2017: 89.7
- 2018 (projection): 87.3
- 2019 (projection): 84.7
- Net debt:
- 2014: 28.0
- 2015: 27.7
- 2016: 28.5
- 2017: 27.8
- 2018 (projection): 27.6
- 2019 (projection): 27.2
- Money and Credit (Annual average):
- Household Real Credit Growth:
- 2014: 4.1
- 2015: 4.0
- Business Real Credit Growth:
- 2014: 5.7
- 2015: 7.2
- 2016: 3.9
- 2017: 6.8
- 2018 (projection): 7.1
- 2019 (projection): 7.9
- Three-month treasury bill 2/:
- 2014: 0.5
- 2015: 1.7
- Ten-year government bond yield 2/:
- 2014: 1.5
- 2015: 2.7
- Balance of Payments:
- Current account balance 1/:
- 2014: -2.4
- 2015: -3.6
- 2016: -3.2
- 2017: -2.9
- 2018 (projection): -2.0
- Merchandise Trade balance 1/:
- 2014: -1.3
- 2015: -0.8
- Export volume (percent change):
- 2014: 5.9
- 2015: 3.5
Source: Press Release No. 18/295 — IMF Executive Board Concludes 2018 Article IV Consultation with Canada (July 16, 2018).