{
  "title": "Canada: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, June 20, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/06/20/canada-staff-concluding-statement-of-the-2023-article-iv-mission",
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  "summary": "The Canadian economy is gradually slowing but has been more resilient than expected. After slowing sharply in Q4:2022 (albeit partly reflecting a drawdown of inventories), activity accelerated in Q1:2023 on the back of strong trade and consumption, which offset weaker investment.",
  "publishDate": "2023-06-20",
  "sections": [
    {
      "heading": "Recent developments, outlook, and risks",
      "content": "- The Canadian economy is gradually slowing but has been more resilient than expected.\n- Activity: After slowing sharply in Q4:2022 (partly reflecting a drawdown of inventories), activity accelerated in Q1:2023 on the back of strong trade and consumption, which offset weaker investment.\n- Output gap: estimated at +0.4 percent.\n- Labor market:\n  - Vacancies have dropped noticeably and firms report fewer labor bottlenecks and shortages.\n  - Supported by a significant increase in immigration and in labor force participation, potentially bolstered by the government’s investment in a Canada-wide early learning and childcare system.\n  - Unemployment rate: 5.2 percent (very low).\n  - Wage growth: elevated.\n- Housing:\n  - After a sharp correction, the housing market is rebounding.\n  - About half of the pandemic surge in house prices was erased during 2022, but prices have risen again since the start of 2023; rents have climbed throughout.\n  - Drivers include strong demand from rapid post-pandemic immigration and reduced turnover from owners locked into cheaper mortgages.\n- Inflation:\n  - Headline inflation fell from a peak of 8.1 percent y/y in June 2022 to 4.4 percent in April (aided by base effects related to energy prices).\n  - Core inflation declined more moderately—from around 6 percent y/y at its peak last year to 4.1 percent in April.\n  - On a three-month annualized basis, the BoC’s preferred measures of core inflation rose to 3.9 percent on average in April, from 3.6 percent in March.\n- Financial system resilience:\n  - Six largest banks account for 92 percent of total assets.\n  - Banks are well capitalized, liquid, and profitable; funding sources well diversified amid robust deposit growth; SMSBs have weathered recent turmoil reasonably well.\n  - Commercial real estate performing better than in other countries; CRE concentration in SMSBs is not present in Canada.\n  - Pension funds generally less leveraged and have access to liquidity backstops.\n\n- Outlook (staff projections and timing):\n  - Tight monetary policies are expected to slow activity.\n  - Real GDP growth projected to fall from an average of 3.4 percent in 2022 to 1.7 percent in 2023, with the economy bottoming out by the third quarter.\n  - Unemployment expected to rise gradually to slightly above its long-term level of 6 percent in 2024.\n  - Headline inflation should ease to around 3 percent by September 2023.\n  - Core inflation should reach around 3 percent by early 2024.\n  - Inflation is projected to return to the 2-percent target by end-2024.\n\n- Risks to the outlook:\n  - Elevated; the economy could slip into a mild recession if downside risks materialize.\n  - Downside scenarios: abrupt slowdown in the rest of the world (e.g., related to banking turmoil) with spillovers; inflation proving stickier requiring additional BoC tightening; upcoming mortgage resets weighing on household consumption and debt service; rising interest rates posing risks to some banks.\n  - Financial stability concerns: need for strong oversight, especially of SMSBs which are less diversified and more vulnerable.\n  - Upside scenarios: higher-than-expected U.S. growth, quicker normalization of supply chains, faster moderation in inflation permitting a less restrictive monetary stance."
    },
    {
      "heading": "Macroeconomic and financial policy recommendations",
      "content": "- Monetary policy:\n  - The Bank of Canada’s recent rate hike following a “conditional pause” was appropriate and reinforces commitment to bring inflation down to target.\n  - The BoC should maintain a data-dependent posture given stickiness of core inflation and strength in some labor and housing indicators.\n  - Be ready to hike again or keep the policy rate high for longer if incoming data warrant.\n  - Communication enhancements suggested:\n    - Provide quarterly (not just annual) paths for key variables in the Monetary Policy Report (MPR).\n    - Conduct regular ex post evaluations of inflation-forecast errors.\n    - Consider, at an appropriate time, publishing a policy rate path consistent with economic projections and revise it regularly in response to incoming data.\n- Fiscal policy:\n  - Fiscal policy should be kept tight to support disinflation goals.\n  - 2023 federal budget introduced important new spending; about two-thirds was accommodated by slowing the pace of fiscal consolidation—cyclically-adjusted general-government deficit now expected to narrow only slightly this year.\n  - Federal debt ratio projected to rise briefly before resuming a downward path; ends the horizon slightly higher than previously projected.\n  - Rebuilding fiscal buffers is a priority.\n  - Consider adopting a quantitative fiscal framework to enhance credibility and accountability:\n    - Could include a debt anchor with escape clauses for large shocks and an operational rule to return to the anchor.\n    - Staff analysis suggests such a framework could reduce the output costs of consolidation.\n- Financial regulation and supervision (areas for strengthening):\n  - Banks:\n    - Deposit insurance appears adequate, with more than 90 percent of depositors covered, but scope may exist to further protect depositors at small banks.\n    - Consider extending the Domestic Stability Buffer, recently increased for larger banks, to SMSBs as well.\n  - Nonbank financial institutions (NBFIs):\n    - Implement more routine and compulsory top-down stress tests by federal and provincial regulators to complement institution-led exercises.\n    - Supervisors may need additional powers to compel information from pension funds and asset managers; current voluntary approaches have limits.\n  - Coordination and data sharing:\n    - Strengthen coordination between federal and provincial supervisors.\n    - Address data privacy legal provisions that constrain sharing of supervisory information.\n  - AML/CFT:\n    - Continue progress in strengthening AML/CFT frameworks.\n    - Special attention to cross-border money laundering risks in banking and real estate sectors.\n    - Further engagement with provinces to ensure pan-Canadian coverage and harmonized approaches to beneficial ownership data collection and publication.\n    - After British Columbia’s real property beneficial ownership registry, similar registries are needed in other vulnerable real estate markets.\n- Crisis response:\n  - Allow fiscal automatic stabilizers to operate in downturns.\n  - Monetary policy could be adjusted in either direction depending on inflation persistence and external demand.\n  - Deploy macroprudential and liquidity-provision tools in case of financial stress.\n  - If stress is severe and both credit growth and inflation are dampened, the BoC might need to rein in rate hikes.\n  - Consider activating temporary authorities under discussion to allow the Minister of Finance to increase deposit insurance coverage in a crisis."
    },
    {
      "heading": "Climate and housing policies",
      "content": "- Climate mitigation:\n  - Canada’s multipronged climate mitigation strategy centered around carbon pricing is commended.\n  - Staff analysis suggests carbon pricing and other policies could produce a 30 percent reduction in emissions by 2030 relative to 2005.\n  - Expeditious implementation of all elements of Canada’s Emissions Reduction Plan (including a separate cap on emissions in the oil and gas industry and clean electricity regulations) could deliver the 40-45 percent commitment in the NDC.\n  - These steps, plus future technological advances, should help Canada on the road to net zero by 2050.\n  - To mitigate negative competitiveness spillovers from carbon taxation, consider effective recycling of revenues and exchange rate flexibility.\n  - Consideration could be given to a differentiated international carbon price floor, an effort Canada could help lead.\n- Green subsidies and industrial policy:\n  - Investment tax credits to clean electricity and green energy and technology in the 2023 federal budget, complementary 2022 measures, and production subsidies to automakers can support the green transition.\n  - Risks and design recommendations:\n    - Greater international coordination desirable to mitigate a “race to the bottom” and investment-location distortions.\n    - Exercise caution on heavy focus on electric vehicles and batteries given rapid technological change.\n    - Prefer a standard, time-bound incentive regime rather than negotiating company-specific packages to ensure evenhandedness and transparency.\n    - Ensure subsidies are designed in a WTO-consistent manner to counter geoeconomic fragmentation.\n- Housing supply and affordability:\n  - Additional policy steps needed to boost housing supply and promote affordability amid rising mortgage rates and rapid immigration.\n  - Housing Accelerator Fund (2022 budget) is a positive step but more is needed to expedite permitting and promote densification.\n  - Consider creating a permanent discussion forum for federal, provincial, and municipal officials responsible for housing and immigration, and stakeholders from construction industry and advocacy groups."
    },
    {
      "heading": "Key statistics and projections (Table highlights)",
      "content": "- Nominal GDP (2022): Can$ 2,785 billion (US$ 2,139 billion)\n- Quota: SDR 11,023.9 million\n- Population (2022): 39.6 million\n- GDP per capita (2022): US$ 54,015\n- Main exports: Oil and gas, autos and auto parts, gold, lumber, copper.\n\nSelected projections and historical values (percentage change, unless otherwise indicated):\n- Real GDP growth:\n  - 2020: -5.1\n  - 2021: 5.0\n  - 2022: 3.4\n  - 2023: 1.7\n  - 2024: 1.4\n  - 2025: 2.2\n  - 2026: 1.9\n- Total domestic demand:\n  - 2020: -6.0\n  - 2021: 6.6\n  - 2022: 4.7\n  - 2023: -0.5\n  - 2024: 1.5\n  - 2025: 2.6\n  - 2026: 2.1\n  - 2027: 2.0\n- Private consumption:\n  - 2020: -6.1\n  - 2021: 4.8\n  - 2022: 3.9\n  - 2023: 2.3\n  - 2024: 3.5\n- Total investment:\n  - 2020: -7.4\n  - 2021: 13.9\n  - 2022: 7.0\n  - 2023: -9.5\n  - 2024: 0.8\n  - 2025: 2.5\n  - 2026: 1.8\n- Unemployment rate (average) 2/:\n  - 2020: 9.7\n  - 2021: 7.5\n  - 2022: 5.3\n  - 2023: 5.5\n  - 2024: 6.2\n  - 2025: 6.1\n  - 2026: 6.0\n- CPI inflation (average):\n  - 2020: 0.7\n  - 2021: 6.8\n  - 2022: 3.6\n- Gross national saving (percent of GDP) 1/:\n  - 2020: 20.1\n  - 2021: 23.5\n  - 2022: 24.2\n  - 2023: 21.5\n  - 2024: 21.4\n  - 2025: 21.2\n  - 2026: 21.0\n  - 2027: 20.8\n  - 2028: 20.5\n- General government fiscal indicators (NA basis, percent of GDP) 1/:\n  - Revenue:\n    - 2020: 41.8\n    - 2021: 41.5\n    - 2022: 40.6\n    - 2023: 40.7\n    - 2024: 40.9\n    - 2025: 41.0\n  - Expenditures:\n    - 2020: 52.7\n    - 2021: 45.9\n    - 2022: 41.4\n    - 2023: 41.3\n    - 2024: 41.2\n    - 2025: 41.1\n  - Overall balance:\n    - 2020: -10.9\n    - 2021: -4.4\n    - 2022: -0.8\n    - 2023: -0.6\n  - Gross Debt:\n    - 2020: 118.9\n    - 2021: 115.1\n    - 2022: 106.7\n    - 2023: 105.8\n    - 2024: 103.5\n    - 2025: 101.0\n    - 2026: 98.8\n    - 2027: 96.7\n    - 2028: 94.7\n  - Net debt:\n    - 2020: 15.7\n    - 2021: 15.4\n    - 2022: 14.3\n    - 2023: 14.4\n    - 2024: 14.2\n    - 2025: 14.0\n    - 2026: 13.6\n- Money and credit (annual average):\n  - Household Credit Growth:\n    - 2020: 5.2\n    - 2021: 10.8\n    - 2022: 9.9\n  - Business Credit Growth:\n    - 2020: -0.9\n    - 2021: -12.7\n    - 2022: 6.4\n- Balance of Payments:\n  - Current account balance 1/: -1.7 (2020), -1.9 (2021), -2.4 (2022)\n  - Merchandise Trade balance 1/: 0.2 (2020), -1.1 (2021), -1.4 (2022)\n  - Export volume (percent change): -7.9 (2020), 5.9 (2021), 1.2 (2022), 3.1 (projection)\n  - Import volume (percent change): -7.1 (2020), 8.7 (2021), 3.8 (2022), 4.2 (projection), 4.6, 4.5\n  - Terms of trade: -3.4 (2020), -9.0 (2021), 0.0 (2022)\n\nSource: IMF staff concluding statement of the 2023 Article IV mission for Canada.\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/2023/06/20/canada-staff-concluding-statement-of-the-2023-article-iv-mission"
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    "Published: June 20, 2023",
    "The Canadian economy is gradually slowing but has been more resilient than expected.",
    "Activity: After slowing sharply in Q4:2022 (partly reflecting a drawdown of inventories), activity accelerated in Q1:2023 on the back of strong trade and consumption, which offset weaker investment.",
    "Output gap: estimated at +0.4 percent.",
    "Labor market:",
    "Housing:",
    "Inflation:",
    "Financial system resilience:",
    "Outlook (staff projections and timing):",
    "Risks to the outlook:",
    "Monetary policy:",
    "Fiscal policy:",
    "Financial regulation and supervision (areas for strengthening):",
    "Crisis response:",
    "Climate mitigation:",
    "Green subsidies and industrial policy:",
    "Housing supply and affordability:",
    "Nominal GDP (2022): Can$ 2,785 billion (US$ 2,139 billion)",
    "Quota: SDR 11,023.9 million",
    "Population (2022): 39.6 million",
    "GDP per capita (2022): US$ 54,015",
    "Main exports: Oil and gas, autos and auto parts, gold, lumber, copper.",
    "Real GDP growth:",
    "Total domestic demand:",
    "Private consumption:",
    "Total investment:",
    "Unemployment rate (average) 2/:",
    "CPI inflation (average):",
    "Gross national saving (percent of GDP) 1/:",
    "General government fiscal indicators (NA basis, percent of GDP) 1/:",
    "Money and credit (annual average):",
    "Balance of Payments:",
    "[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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