Canada should withstand a sharp drop in emerging-market growth, although the country’s growth will remain stuck at a low level this year and next, the International Monetary Fund said Tuesday in a revised global economic outlook.
The most dramatic change in the IMF’s regularly updated World Economic Outlook is its forecast for the fast-growing developing countries that have been responsible for so much of the globe’s economic growth in recent years. So far, the IMF says the U.S. budget impasse is having little impact on the global economy, but that would change if the country fails to raise its debt ceiling.
Canada’s economy generally is as strong as that of its trading partners. The IMF predicts Canada’s gross domestic product will grow 1.6 per cent this year and 2.2 per next year. Both estimates are 0.1 percentage point lower than the IMF’s last outlook in July.
Countries such as China, Mexico, India and Russia will grow significantly slower than previously thought. Market volatility this spring related to uncertainty about unconventional monetary policy in richer countries hit emerging markets particularly hard, as their economies already were beginning to flag.
The IMF slashed its outlook for emerging markets by 0.5 percentage point, which dropped its forecast for this year to 4.5 per cent. That is sapping the wider global economy of needed momentum. The world economy will advance 2.9 per cent this year and 3.6 per cent in 2014, compared with July estimates of 3.1 per cent and 3.8 per cent respectively, the IMF said.
Emerging-market growth since the financial crisis has been good for Canada by keeping upward pressure on commodity prices. Weaker demand in those nations will make it harder for Canada to escape the slow-growth rut in which it has been stuck for the better part of two years.
Canada, which relies on exports to power its economy, will be as strong as its southern neighbour. The IMF only shaved its outlook for the United States economy this year, dropping is forecast to 1.6 per cent from 1.7 per cent because federal spending cuts were deeper than expected. American gross domestic product should rally to 2.6 per cent next year, the IMF said.
If House Republicans follow through on their threat to refuse to raise the debt ceiling, all bets are off. Without the ability to borrow, the U.S. government would have to cut spending quickly and deeply, which would dramatically diminish the government’s contribution to GDP, Olivier Blanchard, the IMF’s chief economist said at a press conference. The market reaction is unpredictable, but there is every reason to believe that it would be bad, Mr. Blanchard said.
The IMF said there is little that Canada can do but sit and wait for the global economy to pick up speed. Policy makers “need to continue to support near-term growth,” the fund said, noting that there is a chance that its outlook for Canada could be too optimistic. The IMF sited Canada’s “historically high” household debt, which could “amplify the negative growth impact of adverse shocks to the economy.”