IMF Executive Board Concludes 2011 Article IV Consultation with Canada

Public Information Notice (PIN) No. 11/160
December 22, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Canada is also available.

On December 19, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Canada.1


Thanks to a decisive policy response, a resilient financial sector, and high commodity prices, the economy expanded well above its potential rate in 2010 and early 2011, with gross domestic product (GDP) returning to pre-crisis levels in the second half of 2010. The expansion stalled in the 2nd quarter of 2011, partly due to temporary factors and unfavorable external conditions, although indicators point to a pick-up in the 3rd quarter. Domestic demand remains the driver of growth. While government spending and private consumption have slowed, business investment remains buoyant reflecting low funding costs, cheaper imports of capital goods, and elevated commodity prices. Unemployment has declined steadily from its 2009 peak, but remains above pre-crisis levels.

The external current account balance deteriorated sharply in recent years, reflecting the effects of the crisis and a loss of external competitiveness over the last decade, with a deficit of 3 percent of GDP in 2009–10. Exports of autos, machinery, and lumber were particularly affected by the collapse in U.S. demand, the strength of the Canadian dollar, and competition from emerging markets. The weak export sector has also hampered a stronger recovery in private sector employment, especially in manufacturing where employment remains 10 percent below 2008 levels.

Economic growth is expected to be moderate in the near term, with significant uncertainty related to the unsettled external environment. While interest rates remain low, growth in personal consumption and real estate investment is expected to be relatively subdued, in light of high household debt and measures taken to contain mortgage credit growth. With weak net exports and ongoing fiscal adjustment, business investment is anticipated to play a key role in sustaining growth. Threats outside Canada—including further turbulence from Europe and its impact on global financial markets—are the main source of risk. On the domestic front, high household debt levels, coupled with elevated house prices, are the main vulnerability.

Monetary policy continues to be highly accommodative given ongoing economic slack and well- managed inflationary expectations. The policy rate remains at exceptionally low levels—the target for overnight rate has been kept at 1 percent since September 2010, and no hikes are expected in the near future given that core inflation has remained around the inflation target, inflationary expectations are well anchored, and external risks are high.

Fiscal consolidation is now under way with the federal government leading the efforts. The authorities envisage a return to budgetary balance by 2015–16 with an ambitious plan to bring spending as a share of GDP back to pre-crisis levels, while remaining flexible to changes in the economic outlook.

Canada’s corporate and financial sectors continue to display resilience amid the recent turbulence in international financial markets, also reflecting strong supervision and regulation. Despite some recent tightening, credit conditions remain highly favorable, with both firms and banks taking advantage of funding costs well below historical averages. Banks’ financial soundness indicators are at strong levels, with near-term risks stemming primarily from potential spillovers from European markets.

Executive Board Assessment

Executive Directors commended the authorities’ exemplary macroeconomic management and financial sector oversight, which have enabled Canada to weather the global crisis well. Directors noted that the pace of the recovery has slowed, after a strong rebound in 2010. While Canada’s medium term outlook remains broadly favorable, near term downside risks are high due to the financial market turmoil in Europe and rising household indebtedness. Accordingly, policymaking should remain flexible and pragmatic in the period ahead.

Directors endorsed the Bank of Canada’s conduct of monetary policy. They agreed that, with the prevailing economic slack and with core inflation and expectations well within the target range, monetary policy should continue to be accommodative at present. Most Directors agreed that there is scope for further monetary easing if the economy weakens. Directors welcomed the Bank of Canada’s preparedness to respond quickly to liquidity strains in the event of increased financial turbulence from Europe.

Directors supported the authorities’ intention to gradually remove fiscal stimulus and return to fiscal balance over the medium term. They stressed that provincial governments also need to move ahead with fiscal consolidation. Most Directors agreed that, within the medium term consolidation plans, there is space for countercyclical fiscal support if the economic outlook deteriorates, given the low level of government net debt.

Directors welcomed the authorities’ adoption of macro prudential measures to curb the build up of mortgage debt. With household debt at a historical high and various indicators suggesting house price levels above fundamentals in some regions, Directors called for continued vigilance in this area. Strengthening oversight of the Canadian Mortgage and Housing Corporation will be particularly important. Directors welcomed the authorities’ willingness to take additional action should prices and household indebtedness continue to rise.

Directors commended Canada’s strong financial regulation and supervision. This has resulted in a stable and resilient banking sector, which has resisted the international financial crisis well and remains well prepared to deal with most adverse scenarios. Nonetheless, Directors called for continued close monitoring of spillover risks, as well as risks associated with a prolonged period of exceptionally low global interest rates. Directors welcomed Canada’s leadership in implementing the international financial reform agenda, and its valuable contributions to developing new global regulatory standards.

Directors highlighted a gradual loss of external competitiveness over the years and the importance of reversing this trend, particularly through efforts to improve the business environment and boost productivity. Directors also stressed the need for a concerted effort to contain the rising health care costs associated with population aging. The forthcoming review of transfers from the federal government to the provinces provides an opportunity to address this issue.

Canada: Selected Economic Indicators 1/
(Annual change in percent, unless otherwise noted)
            Proj. Proj.
  2006 2007 2008 2009 2010 2011 2012

Real GDP

2.8 2.2 0.7 -2.8 3.2 2.2 1.9

Net exports 2/

-1.4 -1.5 -2.1 0.2 -2.1 -1.3 -0.2

Total domestic demand

4.4 3.9 2.8 -2.8 5.2 3.6 2.1

Final domestic demand

4.6 4.0 3.0 -2.1 4.5 2.9 1.8

Private consumption

4.2 4.6 3.0 0.4 3.3 1.9 1.6

Public consumption

3.0 2.7 4.4 3.6 2.4 0.8 -0.2

Private fixed domestic investment

7.1 3.1 1.2 -16.6 8.4 9.3 5.3

Private investment rate (as a percent of GDP)

20.5 20.7 20.8 17.9 18.8 20.1 20.7

Public investment

6.8 6.5 7.7 8.8 17.9 0.6 -2.5

Change in inventories 2/

-0.2 -0.1 -0.2 -0.8 0.6 0.5 0.4

GDP (current prices)

5.6 5.5 4.8 -4.6 6.3 5.3 3.9

Employment and inflation


Unemployment rate

6.3 6.1 6.2 8.3 8.0 7.4 7.2

Consumer price index

2.0 2.1 2.4 0.3 1.8 2.9 2.0

GDP deflator

2.7 3.2 4.1 -1.9 2.9 3.0 1.9

Exchange rate (period average)


U.S. cents/Canadian dollar

88.2 93.1 93.7 87.5 97.1 .. ..

Percent change

6.4 5.3 0.7 -7.1 9.9 .. ..

Nominal effective exchange rate

6.7 3.7 -0.9 -5.2 10.5 .. ..

Real effective exchange rate

9.3 6.4 -2.3 -7.8 7.9 .. ..

Indicators of financial policies (national accounts basis, as a percent of GDP)


Federal fiscal balance

0.8 1.0 0.2 -2.2 -2.6 -1.9 -1.5

Provincial fiscal balance 3/

0.0 -0.4 -1.0 -3.5 -3.5 -3.5 -3.1

General government fiscal balance

1.6 1.6 0.1 -4.9 -5.6 -4.8 -4.0

Three-month treasury bill

4.0 4.2 2.4 0.4 0.6 0.9 1.0

Ten-year government bond yield

4.2 4.3 3.6 3.2 3.2 2.8 2.5

Balance of payments


Current account balance (as a percent of GDP)

1.4 0.8 0.3 -3.0 -3.1 -3.5 -3.8

Merchandise trade balance (as a percent of GDP)

3.4 3.1 2.8 -0.3 -0.6 -0.7 -1.0

Export volume

0.8 1.3 -5.3 -15.0 6.9 3.3 3.7

Import volume

5.1 5.5 1.3 -14.9 13.9 7.5 4.6

Invisibles balance (as a percent of GDP)

-2.0 -2.3 -2.5 -2.6 -2.6 -2.8 -2.8

Saving and investment (as a percent of GDP)


Gross national saving

24.4 24.1 23.6 17.9 19.1 19.9 20.4

General government

4.6 4.5 2.9 -0.9 -1.2 -0.6 0.1


19.8 19.6 20.7 18.8 20.3 20.4 20.3


5.0 4.6 5.4 6.2 6.2 5.5 5.1


14.9 14.5 15.1 12.1 13.4 14.9 15.3

Gross domestic investment

23.0 23.2 23.2 20.9 22.2 23.4 24.1

Sources: Statistics Canada and IMF staff estimates.

  1/ Data as available on November 15, 2011.

  2/ Contribution to growth.

3/ Includes local governments and hospitals.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here:


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