IMF Mission to Canada concludes Article IV Consultation and Releases Preliminary ReportPress Release No. 11/385
October 31, 2011
An International Monetary Fund (IMF) mission visited Canada from October 11–24 to conduct the country’s annual Article IV consultation. At the conclusion of the mission, Mr. Gian Maria Milesi-Ferretti, chief of the North America division of the Western Hemisphere Department, issued the following statement in Toronto:
“After a strong recovery from the crisis, growth in Canada is moderating. Thanks to a decisive policy response, a resilient financial sector, and high commodity prices, the economy expanded well above its potential growth rate in 2010. The Fund’s baseline medium-term outlook is broadly favorable, with growth at about 2 percent on average for 2011 and 2012. But risks are tilted to the downside given the challenging external environment: weak demand in trading partners, a strong Canadian dollar, and fiscal retrenchment.
“In this context, the mission sees the following policy priorities for Canada: i) manage the transition to a neutral macroeconomic policy stance and press ahead with the reforms needed to address long-term fiscal concerns; ii) deal with the challenges posed by elevated household debt in the context of buoyant house prices and an uncertain economic outlook; and continue to move forward with the domestic and international reform agenda for financial regulation and supervision.
“Under our baseline scenario the mission sees as appropriate that fiscal policy shifts toward consolidation in the aftermath of the effective stimulus program. Overall, the mission projects a reduction in the general government deficit in 2012 of around 1 percent of GDP. In terms of monetary policy, an accommodative stance will remain appropriate for some time given stable inflation expectations, ongoing economic slack, forthcoming fiscal drag, and heightened external risks.
“Nevertheless, in an uncertain global economic environment, macroeconomic policies should react quickly and flexibly to significant changes in the economic outlook. The mission sees the full operation of automatic fiscal stabilizers (allowing a higher deficit due to automatic rises in some programs, like unemployment benefits, and lower tax receipts due to weaker economic activity) and a reduction in the monetary policy rate as the first line of response should the recovery falter—particularly in the case of lower external demand. Should domestic demand weaken materially, there is some space to loosen the fiscal stance relative to plans, and temporary stimulus may become appropriate in a major downside scenario, while maintaining the medium-term consolidation plans.
“With the elevated level of household debt and high house prices posing macroeconomic risks, the authorities have correctly adopted macro-prudential measures to curb the build-up of mortgage debt. These measures, together with rising uncertainty because of global financial market turmoil, have reduced the pace of mortgage credit growth, and may lead to a more subdued pace of household borrowing and a moderation in house prices going forward. Nevertheless, should prices and the debt level continue to rise faster than disposable income, additional measures may be needed to forestall the risk of a more disruptive adjustment down the road, which could affect consumption and construction activity.
“Overall, Canadian banks are solid and well-supervised, and Canada’s institutional arrangements are supportive of an appropriately coordinated response from the authorities should the need arise, as evidenced by their proactive approach during the crisis. The mission supports Canada’s efforts to advance the international and domestic financial reform agenda, including through a plan to adopt the Basel III capital and liquidity requirements ahead of internationally agreed timelines. That said, attention needs to be paid to the consequences of a prolonged period of low interest rates, which could encourage excessive borrowing and risk-taking as well as weigh on the profitability of insurance companies and the solvency of pension funds with defined benefits.
“The mission is grateful to the Canadian authorities for their hospitality and for the very open discussions during our mission.”