IMF Executive Board Concludes 2023 Article IV Consultation with Canada
IMF News, July 27, 2023
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- Published: July 27, 2023
Overview and Executive Board Assessment
- The Executive Board concluded the Article IV consultation with Canada and considered and endorsed the staff appraisal without a meeting.
- The Canadian economy is decelerating, accompanied by a sharp decline in headline inflation, while core inflation has been stickier and short-term expectations remain elevated amid still-tight labor markets.
- The financial system appears broadly resilient despite global banking stresses and ongoing mortgage resets at higher interest rates; the housing market is rebounding, partly reflecting the substantial increase in immigration.
- The external position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- The outlook is subject to important downside risks; shocks could tip the economy into a mild recession.
- Tight macro policies remain necessary. Assuming the economy evolves in line with baseline projections:
- Monetary policy should remain restrictive and data dependent.
- Quantitative tightening should continue, and enhancements to monetary policy communication could be pursued.
- Fiscal consolidation is proceeding, although at a slower pace than previously envisaged; fiscal policy should support inflation reduction goals.
- A quantitative fiscal framework, including a specific debt anchor and a supporting operational rule, would enhance policy credibility and communication.
- Measures to promote housing affordability, particularly through increased supply, remain necessary.
- Financial-sector policy enhancements recommended include strengthening capital and liquidity requirements on smaller banks and expanding stress testing of NBFIs.
- Canada’s AML/CFT framework is generally appropriate but further focus is needed on assessment and mitigation of cross-border money laundering risks, particularly in the banking and real-estate sectors; the proposed Canada Financial Crimes Agency and steps toward beneficial-ownership registries are welcomed.
Recent Developments and Outlook
- Growth and inflation:
- Growth registered 3.4 percent in 2022, slowing sharply at the end of the year before rebounding in Q1:2023, driven primarily by strong trade and consumption.
- Growth is expected to decline to 1.7 percent in 2023 due to the contractionary stance of monetary and fiscal policies.
- Headline inflation fell from its June 2022 peak of 8.1 percent to 3.4 percent by May 2023.
- Core inflation declined from around 6 percent last year to 3.7 percent in May 2023.
- With continued tight policies and slowing growth, inflation is expected to approach the 2-percent target by end-2024.
- Risks:
- External risks to a highly open economy like Canada are substantial and compound domestic vulnerabilities related to inflation expectations, the housing market, and household leverage.
- Shocks could push the economy into a mild recession.
Financial Sector and Housing
- The financial sector faces risks from:
- High household leverage and housing-market developments.
- Rising interest rates.
- Global banking stresses.
- While resilient to date, scope exists to:
- Strengthen capital and liquidity requirements on smaller banks.
- Expand stress testing of NBFIs.
- Progress continues on the 2019 FSAP recommendations, but data gaps and fragmentation remain important issues highlighted by recent global market volatility.
- Housing market rebound noted; policies to improve affordability through increased supply are necessary.
Structural and Climate-Related Issues
- Canada is positioning itself as a reliable supplier of critical minerals and energy and has attracted some major new green investments.
- Long-term challenges include:
- Strengthening the investment climate.
- Boosting productivity growth.
- Implementing ambitious policies to achieve climate mitigation targets.
- Canada is among the world’s top-ten emitters of greenhouse gases, but announced climate mitigation policies should go a long way toward delivering its NDCs.
- Potential adverse competitiveness implications of climate policies could be mitigated by exchange rate flexibility and well-designed recycling of carbon tax revenues; remaining effects could be addressed through international cooperation, such as on a carbon price floor.
- Green industrial policies can help the transition but pose design risks; Canada should eschew approaches that distort trade.
Projections and Scenarios (selected)
- Growth (Real GDP, percent change):
- 2020: -5.1
- 2021: 5.0
- 2022: 3.4
- 2023: 1.7
- 2024: 1.4
- 2025: 2.2
- 2026: 1.9
- Total domestic demand (percent change):
- 2020: -6.0
- 2021: 6.6
- 2022: 4.7
- 2023: -0.5
- 2024: 1.5
- 2025: 2.6
- 2026: 2.1
- 2027: 2.0
- Private consumption (percent change):
- 2020: -6.1
- 2021: 4.8
- 2022: 3.9
- 2023: 2.3
- 2024: 3.5
- Total investment (percent change):
- 2020: -7.4
- 2021: 13.9
- 2022: 7.0
- 2023: -9.5
- 2024: 0.8
- 2025: 2.5
- 2026: 1.8
- Unemployment rate (average, percent):
- 2020: 9.7
- 2021: 7.5
- 2022: 5.3
- 2023: 5.5
- 2024: 6.2
- 2025: 6.1
- 2026: 6.0
- CPI inflation (average):
- 2020: 0.7
- 2021: 6.8
- 2022: 3.6
Fiscal and Debt Indicators (percent of GDP)
- General government revenue:
- 2020: 41.8
- 2021: 41.5
- 2022: 40.6
- 2023: 40.7
- 2024: 40.9
- 2025: 41.0
- General government expenditures:
- 2020: 52.7
- 2021: 45.9
- 2022: 41.4
- 2023: 41.3
- 2024: 41.2
- 2025: 41.1
- Overall balance:
- 2020: -10.9
- 2021: -4.4
- 2022: -0.8
- 2023: -0.6
- Gross Debt:
- 2020: 118.9
- 2021: 115.1
- 2022: 106.7
- 2023: 105.8
- 2024: 103.5
- 2025: 101.0
- 2026: 98.8
- 2027: 96.7
- 2028: 94.7
- Net debt:
- 2020: 15.7
- 2021: 15.4
- 2022: 14.3
- 2023: 14.4
- 2024: 14.2
- 2025: 14.0
- 2026: 13.6
Savings, Investment, Credit, and External Balances
- Gross national saving (percent of GDP):
- 2020: 20.1
- 2021: 23.5
- 2022: 24.2
- 2023: 21.5
- 2024: 21.4
- 2025: 21.2
- 2026: 21.0
- 2027: 20.8
- 2028: 20.5
- Private saving (percent of GDP):
- 2020: 26.9
- 2021: 24.3
- 2022: 21.7
- 2023: 18.9
- 2024: 19.0
- 2025: 18.8
- 2026: 18.5
- 2027: 18.3
- 2028: 18.0
- Personal saving (percent of GDP):
- 2020: 32.3
- 2021: 22.7
- 2022: 12.0
- 2023: -2.0
- 2024: -2.2
- 2025: -1.8
- 2026: (not provided)
- Business saving (percent of GDP):
- 2020: -5.5
- 2021: 16.3
- 2022: 16.7
- 2023: 19.1
- 2024: 19.8
- Gross domestic investment (percent of GDP):
- 2020: 22.3
- 2021: 23.8
- 2022: 24.5
- 2023: 23.0
- 2024: 22.9
- Household Credit Growth (annual average):
- 2020: 5.2
- 2021: 10.8
- 2022: 9.9
- Business Credit Growth (annual average):
- 2020: -0.9
- 2021: -12.7
- 2022: 6.4
- Balance of Payments:
- Current account balance (percent of GDP):
- 2020: -1.7
- 2021: -1.9
- 2022: -2.4
- Merchandise Trade balance (percent of GDP):
- 2020: 0.2
- 2021: -1.1
- 2022: -1.4
- Export volume (percent change):
- 2020: -7.9
- 2021: 5.9
- 2022: 1.2
- 2023: 3.1
- Import volume (percent change):
- 2020: -7.1
- 2021: 8.7
- 2022: 3.8
- 2023: 4.2
- 2024: 4.6
- 2025: 4.5
- Terms of trade:
- 2020: -3.4
- 2021: -9.0
- 2022: 0.0
Key Country Indicators
- 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.
IMF Press Release No. 23/278; data presented in the Press Release were based on information available as of July 13, 2023.