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Parliament Hill in Ottawa. (Sean Kilpatrick/The Canadian Press)
Parliament Hill in Ottawa. (Sean Kilpatrick/The Canadian Press)

IMF warns Canada of growing debt burden Add to ...

The International Monetary Fund increased its 2011 growth forecast for Canada, but warned that inflationary pressures could build and once again pointed to housing and consumer debt as potential tripwires.

In its World Economic Outlook released Monday, the IMF said the Canadian economy will expand 2.8 per cent this year, an upgrade of 0.5 of a percentage point from its January forecast. That was the biggest upward revision in the report, and was attributed to higher investment by the country's business sector and the recent surge in commodity prices that has benefited producing nations like Canada. For 2012, the IMF nudged the forecast down a tick, to 2.6 per cent.

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Still, stronger economic conditions in some advanced countries like Canada will cause price pressures to bubble up, the IMF suggested, warning policy makers may soon need to raise interest rates even if that need isn't yet urgent. Meantime, while the Washington-based lender grouped Canada among countries with moderating real-estate markets that fall short of signalling "price busts," the IMF nonetheless said risks to the recovery are "tilted to the downside," with the key domestic ones coming from housing and debt.

"Given the downside risks to [Canada's]growth outlook, muted inflation pressures, and the forthcoming withdrawal of stimulus, a wait-and-see attitude seems appropriate regarding further increases in the policy rate," the IMF said in the report, adding that countries such as Canada, where borrowing costs are still low, eventually "will have to do more as unemployment rates fall and food and energy prices put pressure on wages."

The IMF's prognosis came one day before Bank of Canada Governor Mark Carney's interest rate decision Tuesday morning, where he is expected to leave the policy benchmark at 1 per cent for a fifth consecutive meeting while hinting at a possible increase this summer. Also, the IMF and World Bank hold their spring meetings later this week in Washington, where finance ministers and central bankers from the Group of 20 major economies will discuss how to advance their efforts to identify and address imbalances in global growth.

The IMF warned in its report that the global recovery continues to face challenges. Tepid growth, high unemployment and bloated budget deficits in advanced nations contrast with accelerating inflation and the risk of overheating in developing countries, particularly those that haven't sufficiently tightened policy or let their currencies appreciate more.

The fund retained its January forecast for the global economy to grow 4.4 per cent this year and 4.5 per cent in 2012, saying the worldwide rebound powered by emerging nations is becoming "more self-sustaining." At the same time, it called attention to threats posed by surging oil prices and turmoil in the Middle East and North Africa, price gains in China, Europe's continuing debt woes, and the economic effect of Japan's disasters.

Developing nations will see average growth of 6.5 per cent this year and next, the IMF said, but richer countries will grow an average of 2.4 per cent in 2011 and 2.6 per cent in 2012.

The IMF cut forecasts for the United States - Canada's No. 1 export market - Japan, and Britain. Key external risks to the Canadian recovery are the sky-high currency's effect on exports, the possibility of a slower-than-anticipated rebound south of the border, and "renewed sovereign strains" in Europe.

The IMF and many economists fret that underwhelming job creation and high energy prices will hold back the U.S. recovery this year. Less than a week after Portugal became the third country in the euro area to seek a financial bailout, Germany's Finance Minister on Monday hinted that Greece may need more relief. There are also concerns that the European Central Bank's interest rate hike last week could scuttle tentative recoveries among the region's weakest links.

Unlike the U.S., the IMF declared Canada's plan to erase Ottawa's budget deficit "sound and credible," although that assessment is based on the plan laid out in the Conservatives' failed budget, not the campaign edition that pledges to balance the books a year earlier by finding billions in as-yet-unspecified savings from a review of government operations.

 

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