Six Charts on Canada’s Economic Outlook for 2019
IMF News, June 25, 2019
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- Published: June 25, 2019
Growth outlook
- Canada’s growth has moderated to a more sustainable rate following the stellar pace set in 2017—the fastest among G7 economies.
- Growth is projected to decline to 1.5 percent in 2019 due to:
- a disappointing first quarter for exports,
- more subdued global growth,
- a slower pace of consumer spending.
- Demand for exports will be supported by:
- a robust US economy,
- Federal Reserve policy likely to remain accommodative,
- the expected approval of the United States–Mexico–Canada Agreement (USMCA), which will reduce trade uncertainty.
- The elimination of US tariffs on steel and aluminum imports and Canada’s retaliatory measures will also generate positive benefits.
Housing market
- The housing market is cooling down due to a combination of financial stability measures and tighter monetary policy that made mortgage financing more expensive.
- Key statistics:
- Residential mortgage credit growth has slowed to just 3.1 percent.
- Nationwide, house prices are 2.5 percent lower than the peak in mid-2018.
- In Toronto, Hamilton, and Vancouver, declines in house prices have reduced speculative “froth” but prices remain overvalued.
- The stock of household debt is still high at 176 percent of disposable income.
- Effects:
- The number of new mortgages extended to highly indebted borrowers has fallen sharply.
- Reductions in housing market imbalances have led to somewhat lower near-term risks to growth and financial stability.
- Assessment:
- Policies that strengthen financial stability have been effective in containing housing-related financial stability risks and the current stance is appropriate.
Financial system resilience and vulnerabilities
- The financial system is robust and, according to the recent IMF Financial Stability Assessment Program report, would be able to withstand severe shocks.
- Remaining vulnerabilities:
- Elevated household debt and housing market imbalances remain substantial and pose financial stability concerns.
- Distributional impacts in a severe shock scenario:
- The share of households with debt at risk (defined as households with mortgage payments greater than 40 percent of income) would increase from 17 percent to 29 percent.
- Mortgage insurers would need a capital injection.
- The Canada Mortgage and Housing Corporation, as well as the private mortgage insurers, would need additional capital of Can$15 billion (around 0.7 percent of GDP) to meet the supervisory target ratio.
- Major deposit-taking institutions would remain resilient because they hold enough capital and liquidity buffers.
Fiscal policy
- At both the federal and provincial levels, fiscal consolidation (for example, either by cutting spending or raising taxes) should be gradual, with potential government savings targeting deficit and debt reduction.
- Assessment of current plans:
- The planned adjustment is appropriate at the federal level.
- Provincial governments should do more to create more spending room.
- Rationale:
- Greater fiscal space will ensure both levels of government have enough room to respond in case of a downturn.
- Reducing debt faster would provide more options to handle future challenges, such as those related to aging and weak productivity growth.
Internal trade, productivity, and infrastructure
- Internal trade:
- Significant opportunities for productivity gains exist from promoting internal trade.
- Many non-tariff trade barriers in Canada—stemming from the division of powers and responsibilities between federal and provincial authorities—hinder labor mobility, narrow consumer choice, fragment markets, stifle competition, and limit the effective scale of production.
- Staff analysis suggests lowering non-tariff trade barriers could increase real GDP per capita by almost 4 percent—a much larger gain than expected from recently-signed international trade agreements.
- Recommendation: Federal, provincial and territorial governments should make reducing internal trade barriers their common priority.
- Productivity and structural reform:
- With an aging working population, Canada needs to boost productivity to lift long-term growth.
- Structural reforms must remain a key objective of the government’s growth agenda.
- Implementation of the Innovation and Skills Plan is underway but addressing restrictive regulations in product markets and foreign direct investment is still pending.
- Infrastructure:
- Efforts to encourage infrastructure investment are welcome, including progress in fully operationalizing the Canada Infrastructure Bank.
- Challenges remain in project selection, execution and coordination—especially at the provincial and municipal levels—which must be overcome to avoid delays in infrastructure investment.
- Recommendation: Canada’s long-term interest may be better served with a more detailed strategic infrastructure plan to prioritize projects, including encouraging greater inter-provincial trade.
International Monetary Fund — Six Charts on Canada’s Economic Outlook for 2019 (June 25, 2019)