The International Monetary Fund has cut its outlook for Canada’s economy, and is advising the Bank of Canada to leave interest rates low until a recovery is entrenched.
Canada’s gross domestic product will expand 1.5 per cent in 2013, a downgrade from January, when the IMF predicted the country’s GDP would increase 1.8 per cent. That would be the weakest growth since 2008, when Canada slid into recession, and the second consecutive year of growth of less than 2 per cent.
In the United States, the economy should be steadier, which will lift Canadian exports, the IMF said in its latest World Economic Outlook, released Tuesday in Washington.
But there is little economic impulse for Canada at home. High household debt and a weaker housing market will curb domestic demand. The IMF said it is more likely that its projections for Canada are too optimistic than too pessimistic.
“Risks around the baseline scenario remain tilted to the downside,” the fund said, citing the possibility that U.S. budget tightening could be more severe than expected, threats that the European debt crisis could flare anew, and potentially weaker commodity prices.
The IMF’s revisions are in line with those of other forecasters.
Finance Minister Jim Flaherty based last month’s budget on a forecast for growth in 2013 of 1.6 per cent, the consensus view of 13 private sector analysts.
Overall, the IMF expects the global economy will expand 3.3 per cent in 2013, a downgrade from an estimate of 3.5 per cent in January.
“The road to recovery for advanced economies remains bumpy and uneven for advanced economies,” the fund said. Much of Europe will remain in recession this year, offsetting stronger growth compared with 2012 in the U.S., China, Japan and Brazil, the IMF said.
The IMF’s advice to Canadian policy makers is to remain vigilant.
Finance ministers “have room” to allow programs such as employment insurance and welfare to work to their full potential, the IMF said. The Bank of Canada’s current policy – an extraordinarily low benchmark rate of 1 per cent combined with guidance that borrowing costs will stay low for a considerable period of time – is appropriate, the fund said.
“The beginning of the monetary tightening cycle should be delayed until growth strengthens again,” the fund said.
That moment could come in 2014, when the fund predicts Canada will ride the U.S’s coattails back to a more comfortable level of economic growth.
Next year, the United States, Canada’s largest trading partner, will average growth of 3 per cent for the first time since 2005. Canada’s GDP will expand 2.4 per cent in 2014, the IMF said.