On July 13, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Canada. The 2018 Article IV consultation centered on policies to secure stronger, inclusive, and self-sustaining growth.
The economy has continued to perform well. Growth has been robust and the housing market is finally showing signs of cooling down in response to several rounds of macroprudential measures and monetary tightening. However, economic anxiety is high due to trade tensions, uncertainty about the outcome of NAFTA negotiations, and the impact of the U.S Tax Cuts and Jobs Act on Canada’s medium-term competitiveness.
The positive momentum in the economy is expected to continue in the near term, with real GDP moderating to a more sustainable growth rate of about 2 percent in 2018 and 2019. A fast-growing U.S. economy will provide a near term boost to Canadian exports and contribute to a narrowing of the current account deficit. However, over the medium-term, weak external competitiveness, sluggish labor productivity growth, and population aging are expected to limit potential growth to about 1¾ percent, significantly lower than its historical average.
The outlook is subject to significant risks, both domestic and external. A key domestic risk is a sharp correction in the housing market. In this context, risks to financial stability and growth could emerge, if the house price correction is accompanied by a rise in unemployment and sharp contraction in private consumption. External risks are now more acute than in the past and stem from sources that can be mutually reinforcing—including the impact of U.S. tax reform on Canada’s medium-term competitiveness, uncertainty related to NAFTA negotiations, and the prospect of further escalation in trade tensions. Policy choices will be crucial in shaping the outlook and mitigating risks.
Executive Board Assessment2
Directors commended the impressive performance of the Canadian economy in 2017. They noted that the growth momentum is expected to continue in the near term, but that the outlook is subject to significant downside risks, including from uncertainties related to trade and the impact of recent U.S. tax changes. Directors urged the authorities to rebuild policy buffers and forge ahead with reforms to boost competitiveness and productivity.
With output above potential, Directors agreed that the focus now should be on rebuilding fiscal buffers. They urged provinces that are running high deficits or debt to take the lead in making the necessary fiscal adjustment. They welcomed the federal government’s commitment to set federal debt-to-GDP on a declining path, and broadly noted that the planned consolidation could be frontloaded to take advantage of the favorable performance of the economy. Directors agreed that the authorities could strengthen the credibility of their fiscal framework by explicitly incorporating fiscal rules, although a few Directors questioned whether now is the right timing, as they saw a need for fiscal policy to be able to respond nimbly in the current conjuncture. In the event downside risks materialize, automatic stabilizers should be allowed to operate fully and discretionary measures could be deployed.
Directors noted that the overall impact of the recent U.S. tax reform needs to be fully studied and assessed. In this context, many Directors considered that a review of Canada’s tax system could usefully evaluate the scope for improving efficiency while maintaining competitiveness. Directors stressed the need to avoid a hasty reaction to recent developments and to carefully consider the implications of any potential tax changes.
Directors agreed that the monetary policy stance has been broadly appropriate and inflation is well contained. Against the backdrop of elevated levels of uncertainty, the tightening cycle should proceed with caution and be guided by incoming data on economic activity.
Directors concurred that current macroprudential measures are appropriate and appear to have contributed to a cooling in the housing market. If housing vulnerabilities continue to rise, the authorities should consider introducing additional measures. Directors stressed that a broad set of supply-side policies is needed to address housing affordability concerns and reduce demand pressures.
Directors emphasized the importance of close coordination and information exchange between federal and provincial regulators to mitigate risks to financial stability. Gaps identified in the AML/CFT assessment will need to be addressed. Directors looked forward to the upcoming FSAP for a comprehensive assessment of the financial sector.
Directors urged Canada and its NAFTA trade partners to continue to work constructively to reach an agreement within a reasonable timeframe that further opens trade and promotes competition. Directors commended the authorities for signing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and urged them to ratify the agreement as soon as possible.
Directors stressed that revitalizing productivity is key to boosting long-term growth and commended the authorities for making this a priority. They recommended reducing barriers to inter-provincial trade, facilitating infrastructure investment, and further deregulating product markets to attract FDI. These steps should be implemented in coordination between federal and provincial authorities.
|Output and Demand|
|Total domestic demand||1.8||0.1||0.9||3.8||3.2||1.3|
|Net exports, contribution to growth||1.1||0.9||0.7||–0.9||–0.6||0.7|
|Unemployment and Inflation|
|Unemployment rate (average) 2/||6.9||6.9||7.0||6.3||6.1||6.2|
|CPI inflation (average)||1.9||1.1||1.4||1.6||2.5||2.2|
|Saving and Investment 1/|
|Gross national saving||22.5||20.5||20.0||20.8||20.9||21.9|
|Gross domestic investment||24.9||24.1||23.2||23.7||23.8||23.9|
|General Government Fiscal Indicators 1/|
|Money and Credit (Annual average)|
|Household Real Credit Growth||2.3||3.7||4.1||4.0||3.1||3.1|
|Business Real Credit Growth||5.7||7.2||3.9||6.8||7.1||7.9|
|Three-month treasury bill 2/||0.9||0.5||0.5||0.7||1.1||1.7|
|Ten-year government bond yield 2/||2.2||1.5||1.3||1.8||2.3||2.7|
|Balance of Payments|
|Current account balance 1/||–2.4||–3.6||–3.2||–2.9||–2.9||–2.0|
|Merchandise Trade balance 1/||0.2||–1.2||–1.3||–1.1||–0.8||–0.1|
|Export volume (percent change)||5.9||3.5||0.5||0.7||2.2||4.0|
Percent of GDP.
Percent of GDP.
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 summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.