Canada Staff Concluding Statement of the 2024 Article IV Mission
IMF News, June 11, 2024
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- Published: June 11, 2024
Key findings and recent developments
- Inflation is declining steadily in the context of soft economic activity and a resilient financial sector.
- The Bank of Canada has appropriately begun cutting policy rates.
- Canada’s public debt and deficits remain low in international comparison; the recent introduction of quantitative fiscal objectives is welcome.
- Fiscal policy should be tightened to support the Bank of Canada’s efforts to bring inflation back to target and to rebuild buffers used during the pandemic.
- Housing affordability has reached its worst levels in a generation: mortgage interest rates, rents, and prices are all elevated; vacancy rates have fallen from their historical average of 3 percent to around 1 percent.
- The Canadian economy appears to have achieved a soft landing, avoiding recession even as inflation has fallen substantially; core inflation is already below 2 percent on a 3-month annualized basis.
- Per capita income has declined for six of the past seven quarters, in part reflecting the mechanical effect of the post-pandemic surge in immigration.
- The financial sector remains resilient: banks are well capitalized and liquid; delinquency rates have risen but remain below pre-pandemic levels for mortgage loans, while they have reached or surpassed those levels for auto and installment loans.
- Commercial real estate appears less problematic than in other countries; nonbank financial institutions appear sound but persistent data gaps prevent a comprehensive evaluation.
Outlook and risks
- Baseline growth: Real GDP growth is set to recover gradually to 1.3 percent in 2024, from 1.2 percent in 2023.
- Drivers: gradual normalization of monetary policy, some easing of fiscal policy, continued immigration, and expansion of the Trans Mountain pipeline.
- Consumption is set to recover; mortgage resets will exert a headwind but are limited by households’ relatively healthy balance sheets, increased home equity, and a benign unemployment forecast.
- Inflation is set to gradually decline, reaching the 2-percent target by early 2025.
- Risks (broadly balanced):
- Downside: an abrupt global slowdown; tighter financial conditions from stickier-than-expected inflation (rising shelter costs, continued high wage growth, or further strengthening of the USD against the CAD).
- Upside: labor market resilience and stronger-than-anticipated US growth could lead to stronger growth.
Macroeconomic and financial policy recommendations
- Monetary policy:
- The BoC’s decision to begin lowering its policy rate is appropriate; monetary stance should nevertheless remain restrictive for a while.
- Quantitative tightening should proceed, with securities rolling off the BoC’s balance sheet as they mature.
- The BoC could further strengthen communication: explain how quickly the policy rate could return to neutral; clarify how it views market expectations; consider publishing a forecast-consistent policy rate path.
- Continue transparency measures already adopted (summaries of Governing Council deliberations, press conferences after every scheduled meeting).
- Fiscal policy:
- Some additional fiscal consolidation is recommended to stabilize inflation and restore fiscal space used during the pandemic.
- While federal spending initiatives are appropriate, they should have been offset through greater revenue mobilization.
- The increase in the capital gains inclusion rate improves tax neutrality and is likely to have no significant impact on investment or productivity growth.
- Consider other revenue measures—such as an increase in the GST rate, while raising the GST credit to shield the poor—to deliver a tighter fiscal stance.
- The introduction of quantitative fiscal objectives in the 2023 Fall Economic Statement and adherence in the 2024 budget is welcome; consider a formal public consultation and adopting a formal quantitative fiscal framework.
- Financial sector oversight:
- Faster progress in remedying data gaps is critical, especially for oversight of nonbank financial institutions, including pension funds.
- Consider ensuring regular reporting for systemic risk monitoring.
- Prioritize mechanisms for rapid and regular information sharing between federal and provincial supervisory entities.
- Continue efforts to strengthen frameworks against money laundering and terrorism financing.
Structural challenges and policy actions
- Housing affordability:
- Improving housing affordability is a top priority; failure to address it will hinder local economies’ ability to attract workers and businesses and push homeownership further out of reach for younger generations.
- Supply-side actions recommended:
- Municipalities should reduce red tape, rezone for densification, and utilize public lands.
- Provincial governments should be bolder in pushing municipalities to act and use their own policy levers.
- The federal government should continue to use the power of the purse to incentivize municipalities to facilitate more construction.
- All levels of government could do more to promote social housing, which currently accounts for just 4 percent of Canada’s housing stock.
- Avoid measures that inadvertently boost demand; replace the ban on nonresident housing purchases with a nondiscriminatory tax on speculation.
- Consider creation of a national forum with policymakers at all levels, home builders, NGOs, and other stakeholders to support coordinated action.
- Achieving the goal of building 3.87 million new homes by 2031 will likely require further efforts.
- Productivity and labor force:
- Address lagging productivity growth by boosting corporate investment, addressing interprovincial trade barriers, and better integrating immigrants.
- Strengthen support for participation of women with young children: the affordable childcare program is likely to boost participation, but must be complemented by efforts to train and retain more early childhood educators and to build more centers to ensure widened access.
- Climate and green industrial policy:
- Carbon pricing is essential to meet the commitment to reduce 2005 emissions by 40-45 percent by 2030.
- Replacing the retail fuel charge (set to rise to C$170/ton) with technology subsidies would imply substantially higher costs of achieving climate goals, as confirmed by staff analysis.
- Improve coordination of federal and provincial carbon abatement policies to enhance cost-effectiveness and avoid undermining the carbon price signal.
- Consider a holistic review of the system and creation of a single advisory body on climate policy.
- In green industrial policy, avoid a “race to the bottom” that could contribute to global fragmentation; provide a level playing field and design subsidies in a WTO-consistent manner.
Selected economic indicators and key statistics
- Nominal GDP (2022): Can$ 2,785 billion (US$ 2,139 billion)
- Quota: SDR 11,023.9 million
- GDP per capita (2022): US$ 54,015
- Population (2022): 39.6 million
- Main exports: Oil and gas, autos and auto parts, gold, lumber, copper.
- Output and Demand (Real GDP growth, percent change):
- 2020: -5.0
- 2021: 5.3
- 2022: 3.8
- 2023: 1.2
- 2024 (Proj.): 1.3
- 2025 (Proj.): 2.4
- 2026 (Proj.): 2.0
- 2027 (Proj.): 1.8
- 2028 (Proj.): 1.6
- 2029 (Proj.): (not specified)
- Total domestic demand:
- 2020: -6.1
- 2021: 6.5
- 2022: 5.1
- 2023: -0.3
- 2024 (Proj.): 1.4
- 2025 (Proj.): 2.9
- 2026 (Proj.): 2.3
- 2027 (Proj.): 2.1
- 2028 (Proj.): 1.9
- Private consumption:
- 2020: -6.3
- 2021: 1.7
- 2022: 2.8
- 2023: 3.6
- 2024 (Proj.): 2.7
- 2025 (Proj.): 2.6
- Total investment:
- 2020: -7.0
- 2021: 14.3
- 2022: 7.1
- 2023: -6.0
- 2024 (Proj.): -0.9
- 2025 (Proj.): 3.0
- Net exports, contribution to growth:
- 2020: 0.3
- 2021: -1.8
- 2022: -1.4
- 2023: 1.5
- 2024 (Proj.): -0.2
- 2025 (Proj.): -0.5
- Output gap (percent of potential GDP):
- 2020: -3.4
- 2021: 0.8
- 2022: 0.0
- 2023: -0.6
- 2024 (Proj.): -0.1
- 2025 (Proj.): 0.1
- Unemployment rate (average, percent):
- 2020: 9.7
- 2021: 7.5
- 2022: 5.4
- 2023: 6.2
- 2024 (Proj.): 6.3
- 2025 (Proj.): 6.0
- CPI inflation (average):
- 2020: 0.7
- 2021: 3.4
- 2022: 6.8
- 2023: 3.9
- 2024 (Proj.): 2.5
- Gross national saving (percent of GDP):
- 2020: 20.7
- 2021: 24.3
- 2022: 25.0
- 2023: 23.3
- 2024 (Proj.): 23.4
- 2025 (Proj.): 23.1
- 2026 (Proj.): 22.8
- 2027 (Proj.): 22.5
- 2028 (Proj.): 22.2
- Personal saving (percent of GDP):
- 2020: 32.5
- 2021: 10.4
- 2022: 11.0
- 2023: 14.4
- 2024 (Proj.): 12.8
- 2025 (Proj.): 11.2
- 2026 (Proj.): 10.5
- 2027 (Proj.): 9.8
- 2028 (Proj.): 9.9
- General Government Fiscal Indicators (NA basis, percent of GDP):
- Revenue:
- 2021: 41.4
- 2022: 42.5
- 2023: 41.1
- 2024 (Proj.): 41.9
- 2025 (Proj.): 41.3
- 2026 (Proj.): 41.2
- Expenditures:
- 2021: 52.4
- 2022: 45.4
- 2023: 41.0
- 2024 (Proj.): 42.2
- 2025 (Proj.): 42.1
- 2026 (Proj.): 42.0
- 2027 (Proj.): 41.8
- Overall balance:
- 2021: -10.9
- 2022: -2.9
- 2023: -1.2
- 2024 (Proj.): -1.0
- 2025 (Proj.): -0.8
- 2026 (Proj.): -0.7
- Structural balance (percent of potential GDP):
- 2021: -8.2
- 2022: -1.9
- 2023: -0.4
- Gross Debt (percent of GDP):
- 2020: 118.2
- 2021: 113.5
- 2022: 107.4
- 2023: 107.0
- 2024 (Proj.): 104.9
- 2025 (Proj.): 102.1
- 2026 (Proj.): 100.1
- 2027 (Proj.): 98.4
- 2028 (Proj.): 96.8
- 2029 (Proj.): 95.2
- Net debt (percent of GDP):
- 2020: 16.1
- 2021: 15.6
- 2022: 13.4
- 2023: 13.5
- 2024 (Proj.): 13.6
- Money and Credit (Annual average):
- Household Credit Growth:
- 2021: 5.2
- 2022: 5.0
- 2023: 3.5
- Business Credit Growth:
- 2021: -12.7
- 2022: 6.4
- Balance of Payments:
- Current account balance: -2.0 (percent of GDP)
- Merchandise Trade balance: -1.1 (percent of GDP)
- Export volume (percent change): -7.7 (most recent year shown); subsequent years: 4.5, 3.3, 3.1
- Import volume (percent change): 8.8 (most recent year shown); subsequent years: 5.8, 4.3, 4.8
- Terms of trade: -3.3 (most recent year shown); subsequent years: 4.7, 0.5
Source: IMF staff concluding statement, June 11, 2024.