{
  "title": "Canada: Staff Concluding Statement of the 2019 Article IV Mission",
  "publication": "IMF News, May 21, 2019",
  "sourceUrl": "https://www.imf.org/en/news/articles/2019/05/20/mcs052119-canada-staff-concluding-statement-of-the-2019-article-iv-mission",
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  "summary": "Over the past five years, Canada employed a mix of policies to support inclusive growth and reduce financial system vulnerabilities.",
  "publishDate": "2019-05-21",
  "sections": [
    {
      "heading": "Context",
      "content": "- Over the past five years, Canada employed a mix of policies to support inclusive growth and reduce financial system vulnerabilities.\n- Fiscal space and accommodative monetary policy at the onset of the 2014 oil price shock helped overcome the recession in 2015.\n- The economy posted the strongest growth rate among G7 economies in 2017; the unemployment rate fell to its lowest level in forty years.\n- Policy actions and reforms cited:\n  - Overhaul of NAFTA (USMCA signed, awaiting legislative approval).\n  - Canada Infrastructure Bank opened.\n  - Expansion of tax allowances for business investment following the 2018 U.S. Tax Cuts and Jobs Act.\n  - Macroprudential tightening to slow household debt rise amid a booming housing market.\n- The 2019 Staff Report incorporates findings from the 2019 Financial Sector Assessment Program (FSAP), conducted every five years for G-20 countries."
    },
    {
      "heading": "Outlook and Risks",
      "content": "- Near-term growth projection:\n  - Real GDP growth is projected to decline to 1.5 percent in 2019.\n  - Growth is expected to pick up in 2020 as oil-related activity effects wane.\n  - Over the medium term, potential growth is limited to around 1.7 percent.\n- Factors weighing on growth:\n  - Slowing global growth.\n  - Low oil prices and domestic pipeline constraints dampening exports and business investment.\n  - Deceleration in private consumption and residential investment due to housing slowdown, rising interest rates, and slower real income growth.\n  - Trade tensions (including risk to USMCA ratification) increasing uncertainty.\n- Risks (tilted to the downside):\n  - Domestic: a sharp correction in the housing market that could coincide with a rise in unemployment and collapse in private consumption.\n  - External: larger-than-expected global slowdown, sharp tightening of global financial conditions, escalation of trade tensions, failure to ratify USMCA, or break-up of NAFTA.\n  - Upside risks: stronger-than-expected U.S. growth and an increase in oil prices.\n- Monetary and fiscal stance:\n  - With the output gap becoming more negative in 2019, monetary policy is expected to remain on hold in the near term.\n  - Fiscal stance is expected to be broadly neutral."
    },
    {
      "heading": "Financial Sector Resilience and FSAP Findings",
      "content": "- FSAP adverse scenario assumptions:\n  - A severe recession concurrent with significant financial market stress, large exchange rate depreciation, and a sharp housing market correction.\n- Resilience:\n  - Domestic systemically important banks would remain resilient due to strong revenue-generating capacity and existing capital buffers.\n  - Corporates would be able to withstand sizable income and funding cost shocks.\n- Vulnerabilities:\n  - Household mortgage defaults would rise significantly, with larger effects where household debt is high.\n  - CMHC and private insurers would need a capital injection totaling $15-23 billion (around 1 percent of GDP) to meet the supervisory target ratio under the severe scenario."
    },
    {
      "heading": "Key Policy Messages",
      "content": "- Fiscal policy\n  - Fiscal consolidation should be gradual as growth moderates.\n  - Planned federal fiscal adjustment is appropriate; provinces need to increase the size of their adjustment to achieve overall balance for the general government by 2024.\n  - Any unexpected fiscal savings should target deficit and debt reduction.\n  - If downside risks materialize and growth underperforms, automatic stabilizers should operate fully; discretionary measures could be used depending on downturn severity.\n  - The federal government could explicitly incorporate a fiscal rule that includes a debt anchor and an operational rule balancing enforcement, flexibility, and simplicity.\n  - Regularly scheduled reviews and PBO monitoring are recommended to ensure compliance and prevent circumvention.\n  - Provincial fiscal rules should strengthen the link with debt while protecting public investment; identify sources of fiscal imbalance (e.g., excessive current spending or under-taxation) and consider demographic challenges.\n- Tax and investment policy\n  - Continue to monitor and evaluate tax system effectiveness and efficiency.\n  - Recent tax changes allowing immediate and accelerated expensing are positive.\n  - Further steps toward a cash-flow based system could include permanently allowing immediate expensing of all capital investments and removing interest deductibility.\n- Monetary policy\n  - Monetary policy should remain on hold in the near term.\n  - Further monetary tightening warranted as the output gap closes, implemented at a gradual pace.\n  - If downside risks materialize, the Bank of Canada should be prepared to cut the policy rate.\n- Macroprudential policy and housing\n  - Macroprudential policy has been effective; current stance is appropriate.\n  - Avoid diluting measures with home buyer initiatives that increase household debt.\n  - In event of sharper contraction in credit growth, consider adjustments to macroprudential tools.\n  - Harmonize provincial and municipal tax measures into broad-based measures targeted at speculative activity.\n  - Complement macroprudential policy with supply-side policies: develop a comprehensive housing supply strategy to increase density and alleviate construction bottlenecks.\n  - The establishment of an Expert Panel on the Future of Housing Supply and Affordability is a step in the right direction.\n- Systemic risk surveillance and crisis management\n  - Current framework has worked well but should be modernized.\n  - Responsibilities for systemic risk oversight are dispersed; develop a Canada-wide framework for systemic risk surveillance and oversight.\n  - A revamped Heads of Agencies Committee including all relevant agencies could carry out economy-wide systemic risk analysis, increase transparency and cooperation, and broaden dialogue on macroprudential policy.\n  - The envisaged Capital Markets Stability Act can strengthen systemic risk surveillance and management in capital markets.\n  - The Senior Advisory Committee should oversee Canada-wide crisis preparedness in collaboration with key provincial authorities.\n- Microprudential supervision and safety nets\n  - Address gaps in bank resolution (e.g., compensation to support bail-in), liquidity support (e.g., testing contingency plans), and pension fund risk monitoring (e.g., disclosure requirements).\n  - OSFI should have authority to issue its own legally enforceable regulations.\n  - Memorandums of understanding between OSFI and provincial authorities are still lacking, constraining information exchange and coordination.\n  - Further harmonization of provincial regulatory frameworks is needed; the Cooperative Capital Markets Regulatory System initiative can help.\n  - Additional capital buffers for mortgage exposures and measures to increase risk-based differentiation in mortgage pricing are desirable."
    },
    {
      "heading": "Productivity, Structural Reform, and Trade",
      "content": "- Productivity challenge:\n  - Current levels of productivity growth are insufficient to sustain long-term growth.\n  - Need to attract productivity-enhancing investment to diversify beyond traditional sectors and leverage new trade agreements.\n- Domestic barriers:\n  - Significant opportunities from reducing domestic barriers to inter-provincial trade; longstanding issue requiring sustained collective effort.\n  - The Canadian Free Trade Agreement (2017) provides a platform, but problematic aspects need resolution (e.g., clear targets for reducing exemptions and strengthening regulatory reconciliation).\n  - Potential gains from removing internal trade barriers could increase real GDP by almost 4 percent.\n  - Finance, business services, and insurance would be the most important sectors to benefit.\n  - Efforts to unify securities regulations across provinces and enhance labor mobility are reinforced.\n- Infrastructure and project execution:\n  - Encouragement for infrastructure investment and progress on Canada Infrastructure Bank noted.\n  - Challenges in project selection, execution and coordination at provincial and municipal levels must be overcome.\n  - A more detailed strategic plan is needed to prioritize infrastructure projects serving the long-term national interest.\n  - Federal and provincial authorities should improve financial reporting and cost-tracking to facilitate federal infrastructure funds flow.\n- Trade developments:\n  - Reduction in trade uncertainty from USMCA is welcome; elimination of U.S. tariffs on steel and aluminum and Canada’s retaliatory measures enhance benefits.\n  - Rapid ratification of CPTPP is commended for diversification opportunities.\n  - Canada’s leadership in reaffirming multilateral trading system importance is noted."
    },
    {
      "heading": "Governance and Anti-Corruption",
      "content": "- Canada volunteered for assessment under the IMF’s Enhanced Governance Framework on the supply and facilitation of corruption.\n- Authorities are encouraged to continue enforcement actions against foreign bribery and enhance AML/CFT frameworks to tackle proceeds of crime, including foreign corruption.\n\nIMF Communications Department — May 21, 2019\n\n---\n\n\n References\n\n- Canada and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2019/05/20/mcs052119-canada-staff-concluding-statement-of-the-2019-article-iv-mission"
    }
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    "Published: May 21, 2019",
    "Over the past five years, Canada employed a mix of policies to support inclusive growth and reduce financial system vulnerabilities.",
    "Fiscal space and accommodative monetary policy at the onset of the 2014 oil price shock helped overcome the recession in 2015.",
    "The economy posted the strongest growth rate among G7 economies in 2017; the unemployment rate fell to its lowest level in forty years.",
    "Policy actions and reforms cited:",
    "The 2019 Staff Report incorporates findings from the 2019 Financial Sector Assessment Program (FSAP), conducted every five years for G-20 countries.",
    "Near-term growth projection:",
    "Factors weighing on growth:",
    "Risks (tilted to the downside):",
    "Monetary and fiscal stance:",
    "FSAP adverse scenario assumptions:",
    "Resilience:",
    "Vulnerabilities:",
    "Fiscal policy",
    "Tax and investment policy",
    "Monetary policy",
    "Macroprudential policy and housing",
    "Systemic risk surveillance and crisis management",
    "Microprudential supervision and safety nets",
    "Productivity challenge:",
    "Domestic barriers:",
    "Infrastructure and project execution:",
    "Trade developments:",
    "Canada volunteered for assessment under the IMF’s Enhanced Governance Framework on the supply and facilitation of corruption.",
    "Authorities are encouraged to continue enforcement actions against foreign bribery and enhance AML/CFT frameworks to tackle proceeds of crime, including foreign corruption.",
    "[Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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