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IMF says Canada faring better than others in G7

Workers during their daily tasks on a condominium construction site in downtown Toronto, Ontario, Canada.

Deborah Baic/Deborah Baic/The Globe and Mail

Canada has avoided falling into recession, but the economy is hardly setting the world on fire, with forecasts projecting a very modest degree of growth over the next year or so.

Statistics Canada reported Monday that that Canadian GDP grew 0.3 per cent in August, a better-than-expected increase fuelled by the energy sector.

Output in mining and oil-and-gas jumped 3.3 per cent, a bounce after wildfires in Alberta weighed on energy production in May.

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Excluding energy, however, real GDP was unchanged.

"Underlying growth remains much less impressive," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, who said annualized growth in the four months since April was just under 2 per cent – "likely not a bad gauge of the economy's underlying trend."

Two per cent is about the level of growth the International Monetary Fund projects for Canada in both 2011 and 2012, in a preliminary report released Monday after its officials conducted their annual mission here. That's roughly the same forecast the Bank of Canada issued last week, when it said the outlook has weakened because of a softer global economy.

While growth in Canada is moderating, compared with our peers in the Group of Seven, "Canada is doing well, especially given the circumstances," said Gian Maria Milesi-Ferretti, assistant director of the IMF's North American division.

He warned, however, that Canada is not immune from "a very unsettled external environment that tends to weigh on demands for Canadian products." The risk of turmoil in Europe is dampening both consumer and business confidence, and there are concerns that commodity prices could weaken, Mr. Milesi-Ferretti told a news conference Monday.

According to the IMF, one of the key challenges Canada faces in the coming years is how to get back to a more "normal" interest rate position after years of rock-bottom rates. The budget deficit also needs to be reduced, and the country needs to deal with upward pressures on health spending, Mr. Milesi-Ferretti said.

The high level of household debt in Canada, along with high house prices, are also concerns, he added. If some kind of "external shock" were to push down house prices, household balance sheets could be stretched.

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Over all, Canada suffered less than other G7 countries during the 2008-2009 financial crisis, Mr. Milesi-Ferretti said, and this is remarkable given its dependence on U.S. markets.

One reason for Canada's relative success is its "resilient and well-supervised" financial system, along with credible financial policies from the government and the Bank of Canada, he said. The rapid rise of commodity prices after the crisis also helped.

Still, with so much uncertainty facing the world economy, Canada needs to remain flexible in case things deteriorate, the IMF report said. Fortunately, the Bank of Canada has some room to reduce interest rates slightly and take other fiscal measures. And if domestic demand were to fall sharply, "stimulus may become appropriate," the IMF report says.

Both the IMF and the Bank of Canada are more optimistic about the Canadian economy a little further down the road. The IMF's projection is for 2.6-per-cent growth in 2013, while the central bank says it could hit 2.9 per cent that year.

But Toronto-Dominion Bank chief economist Craig Alexander said projecting growth for 2013, or even for 2012, may be a mug's game, given all the possible scenarios that could change the world economy drastically before then. "There are very big risks out there that have political dimensions to them, [and they]are unforecastable," he said.

If politicians in the U.S. and Europe make significant progress, the resulting boost in confidence could dramatically buoy world markets – including Canada's – resulting in considerably higher growth, Mr. Alexander said. "On the flip side, you could have a banking crisis in Europe that causes an environment that would have some of the characteristics of 2008."

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