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© 2008 International Monetary Fund
February 2008
IMF Country Report No. 08/69
Canada: 2008 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2008 Article IV consultation with Canada, the following documents have been released and are included in this package:
The staff report for the 2008 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on December 17, 2008, with the officials of Canada on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 15, 2008. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff statement of February 6, 2008 updating information on recent developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its February 6, 2008 discussion of the staff report that concluded the Article IV consultation.
The document listed below has been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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International Monetary Fund
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INTERNATIONAL MONETARY FUND
CANADA
Staff Report for the 2008 Article IV Consultation
Prepared by Western Hemisphere Department
(In consultation with other departments)
Approved by Caroline Atkinson and Anthony Boote
January 15, 2008
Executive Summary
Scope and focus. Against the backdrop of slowing U.S. growth, currency appreciation, and global financial strains, the mission focused on near-term outlook risks and policy responses. The discussions also covered the enhancing of productivity and financial sector efficiency.
Background. Canada has enjoyed an enviable macroeconomic performance over the past decade. Reflecting prudent macroeconomic policies and favorable external conditions, real GDP has grown faster than in other G-7 countries, inflation has been low and stable, and fiscal balances have been in surplus (Table 1 summarizes previous policy positions not discussed).
Outlook. The baseline anticipates growth moderation through mid-2008, reflecting weaker external demand and tighter credit conditions. The balance of risks is on the downside given concerns about U.S. growth and unsettled global financial markets, although domestic demand could slow by less than expected.
External currency value. At near parity against the U.S. dollar and with oil prices of $90-100 a barrel, the Canadian dollar seems broadly in line with fundamentals, although some measures suggest modest overvaluation.
Monetary policy. The Bank of Canada appropriately shifted from tightening to easing in response to the evolving balance of risks. Future moves will depend on incoming information.
Financial sector. The Canadian banking system is conservatively regulated, but has not been immune to spillovers from the global liquidity squeeze, including via a shutdown in parts of the asset-backed commercial paper market that was recently resolved in principle. While Canadian banks appear better placed to weather balance sheet problems than those in other major markets, their resilience partly reflects barriers to market contestability that likely hamper access to finance.
Fiscal policy. A prudent policy framework aims at achieving budget surpluses and reducing public debt ratios further. The 2007 Economic Statement appropriately emphasizes tax relief, although lowering the federal GST tax rate has limited efficiency benefits.
Macro-structural policies. The recent policy focus on enhancing productivity growth is timely in view of pressures from real dollar appreciation and an aging population. Besides tax reforms and improving financial intermediation, the focus should be on product market reform.
Analytical work. Background studies examine financial and other spillovers, labor churning, Canada’s inflation targeting framework, and access of small borrowers to finance.
Contents
I. Macroeconomic and Financial Prospects Risks
A. Overview
B. How Much Will Domestic Demand Growth Slow
C. How much of a Risk is a Weaker U.S. Economy?
D. Is the Strong Canadian Dollar Consistent with External Stability?
E. Will Financial Strains Feed Through to the Real Economy?
F. Is Core Inflation Likely to Rebound?
II. Policy Discussions
A. Balancing Strong Domestic Demand with Risks to External Stability
B. Safeguarding Financial Stability and Fostering Bank Competition
C. Improving Tax Efficiency within a Sound Fiscal Framework
D. Promoting Rapid Productivity Growth
III. Staff Appraisal
Tables
1. Fund Policy Advice
2. Indicators of Economic Performance
3. Selected Economic Indicators
4. Balance of Payments
5. Selected Vulnerability Indicators
6. Fiscal Indicators
Figures
A. Overview
B. External Competitiveness
C. External Developments
D. Financial Market Trends
E. Linkages to U.S. Financial Markets
1. Household Activity and Balance Sheets
2. Corporate Sector Indicators
3. Adjustment to Commodity Price Gains and Real Appreciation
4. Monetary Policy Indicators
5. Fiscal Policy Indicators
6. Structural Indicators
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INTERNATIONAL MONETARY FUND
CANADA
Staff Report for the 2008 Article IV Consultation—Informational Annex
Prepared by Western Hemisphere Department
(In consultation with other departments)
January 16, 2008
Contents
I. Fund Relations
II. Statistical Issues
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Public Information Notice (PIN) No. 08/19
FOR IMMEDIATE RELEASE
February 25, 2008
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
