IMF Executive Board Concludes 2021 Article IV Consultation with Canada
IMF News, March 18, 2021
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- Published: March 18, 2021
Economic impact and outlook
- The Canadian economy contracted by 5.4 percent in 2020 and is projected to expand by 4.4 percent in 2021 and by 4.1 percent in 2022, assuming the pandemic fades (IMF projections).
- Canada was operating at close to capacity and had strong policy buffers before the COVID-19 pandemic; official statistics indicate that over 20,000 lives were lost.
- The path of the recovery is linked to the evolution of the pandemic:
- Upside risks: the United States “American Rescue Plan,” higher oil prices, and stronger-than-expected pent up domestic demand.
- Downside risk: recovery could be delayed by new waves of the virus.
Policy response to the pandemic
- Fiscal policy:
- Direct federal fiscal support is expected to amount to almost 15 percent of GDP and includes spending on healthcare, and support for households, firms, and vulnerable groups through cash transfers and wage subsidies.
- Federal liquidity support included tax deferrals, credit facilities, and loan guarantees.
- Monetary policy:
- The Bank of Canada cut its policy interest rate to an historical low and announced a range of programs to support liquidity in the financial system.
- Bank of Canada’s communication strategy for maintaining and eventually withdrawing policy support was welcomed.
- Financial sector measures:
- An array of policies supported banks, insurers, and pension funds.
- Progress was welcomed on implementing recommendations from the 2019 Financial Sector Assessment Program, with attention needed on regulatory capital requirements for mortgage exposures and ensuring mortgage insurers are adequately capitalized.
Executive Board assessment and policy recommendations
- Directors noted that Canada’s history of prudent policymaking and ample buffers provided policy space to respond forcefully to the pandemic and encouraged continued use of public health measures while maintaining adequate policy support.
- Structural policies:
- Continue implementing structural reforms to promote a green and inclusive economy, boost productivity, and diversify beyond traditional sectors.
- Commended Canada’s commitment to fighting climate change.
- Fiscal framework:
- Directors encouraged clearer communication of medium-term fiscal objectives.
- Given possible continued fiscal support needs and the recent rise in public debt, Directors generally considered that introducing a fiscal anchor that clearly illustrates fiscal sustainability would help strengthen credibility of the fiscal framework.
- Monetary and macroprudential policy:
- Current monetary policy settings are broadly appropriate; scaling back policy support once recovery is firmly entrenched will promote financial stability and help rebuild policy space.
- Clear and credible communication will be key to managing expectations.
- Current macroprudential policy settings are broadly appropriate; withdrawal of policy support should balance short-term risks to growth and financial stability against longer-term vulnerabilities from a persistent buildup of leverage and rising house prices.
- Social safety net:
- Directors noted the authorities’ intention to review the employment insurance system, including its role as an automatic stabilizer, and saw scope for greater clarity about conditions that would trigger withdrawal of policy support.
- Addressing gaps in the social safety net was highlighted as important going forward.
Key statistics and projections (selected, as reported by IMF staff calculations)
- Real GDP (percent change): 2016: 1.0; 2017: 3.0; 2018: 2.4; 2019: 1.9; 2020: -5.4; 2021: 4.4; 2022: 4.1.
- Total domestic demand (percent change): 2016: 0.4; 2017: 4.1; 2018: 2.2; 2019: 1.5; 2020: -6.5; 2021: 5.3; 2022: 4.6.
- Private consumption (percent change): 2016: 2.1; 2017: 3.7; 2018: 2.5; 2019: 1.7; 2020: -5.6; 2021: 6.4; 2022: 4.5.
- Total investment (percent change): 2016: -4.9; 2017: 7.2; 2018: 1.0; 2019: 0.7; 2020: -10.4; 2021: 7.9; 2022: 7.0.
- Net exports, contribution to growth (percentage points): 2016: 0.4; 2017: -1.1; 2018: 0.1; 2019: 0.3; 2020: 0.6; 2021: -1.4; 2022: -0.6.
- Unemployment rate (average, percent): 2016: 7.1; 2017: 6.4; 2018: 5.9; 2019: 5.7; 2020: 9.6; 2021: 8.1; 2022: 6.9.
- CPI inflation (average, percent): 2016: 1.4; 2017: 1.6; 2018: 2.3; 2019: 1.9; 2020: 0.7; 2021: 1.6; 2022: 1.8.
- General government overall balance (percent of GDP): 2016: -0.5; 2017: -0.1; 2018: 0.3; 2019: 0.5; 2020: -19.8; 2021: -7.6; 2022: -4.4.
- Gross debt (percent of GDP): 2016: 91.7; 2017: 88.8; 2018: 88.8; 2019: 86.8; 2020: 115.4; 2021: 114.3; 2022: 112.1.
- Net debt (percent of GDP): 2016: 28.7; 2017: 26.0; 2018: 25.6; 2019: 23.4; 2020: 48.0; 2021: 47.4; 2022: 45.5.
- Household credit growth (annual average, percent): 2016: 5.6; 2017: 5.7; 2018: 4.8; 2019: 3.7; 2020: 3.7; 2021: 8.9; 2022: 7.5.
- Business credit growth (annual average, percent): 2016: 5.1; 2017: 7.8; 2018: 6.5; 2019: 5.6; 2020: 3.9; 2021: 7.2; 2022: 8.2.
- Three-month treasury bill (percent): 2016: 0.5; 2017: 0.7; 2018: 1.4; 2019: 1.7; 2020: 0.5; 2021: 0.2; 2022: 0.3.
- Ten-year government bond yield (percent): 2016: 1.3; 2017: 1.8; 2018: 2.3; 2019: 1.6; 2020: 0.8; 2021: 0.9; 2022: 1.0.
- Current account balance (percent of GDP): 2016: -3.1; 2017: -2.8; 2018: -2.3; 2019: -2.1; 2020: -1.5; 2021: -1.0; 2022: -1.4.
- Export volume (percent change): 2016: 0.5; 2017: 0.7; 2018: 3.0; 2019: 0.9; 2020: -7.3; 2021: 16.0; 2022: 6.5.
- Import volume (percent change): 2016: -0.3; 2017: 4.9; 2018: 3.0; 2019: 0.7; 2020: -6.4; 2021: 19.1; 2022: 8.0.
- Terms of trade (percent change): 2016: -1.1; 2017: 3.6; 2018: 0.8; 2019: -0.1; 2020: -2.6; 2021: 5.4; 2022: 0.1.