The International Monetary Fund cast a pessimistic view on Canada's economic prospects for next year, warning that the depressed commodity prices that have slowed the Canadian and global economies in 2015 will remain a major threat to growth in 2016.
In its quarterly World Economic Outlook, entitled Adjusting to Lower Commodity Prices, the IMF once again reduced its gross domestic product forecasts for both Canada and the world as a whole, extending and deepening this year's trend of falling expectations. The global finance agency's forecast for Canadian GDP growth in 2015 is now just 1 per cent – down a half a percentage point from the previous forecast in July, and down 1.3 percentage points from a year ago.
The downgrade to the 2015 forecast was no big surprise, as private-sector forecasters and the Bank of Canada had already reached a similar conclusion about the economy in light of the disappointing outright contraction in the first half of the year. The bigger surprise was that the IMF has cooled considerably on Canada's hopes for a rebound in 2016 – despite recent signs of improvement in the Canadian economy that have sparked optimism among others for a more robust recovery.
The IMF sees the economy sputtering at a sluggish 1.7-per-cent growth pace next year – down four-10ths of a percentage point from July, and far below both the Bank of Canada's most recent call of 2.3 per cent and the private-sector consensus forecast of 2 per cent.
"In commodity exporters, lower commodity prices weigh on the outlook through reduced disposable income and a decline in resource-related investment. The latter mechanism has been particularly sharply felt in Canada," the IMF wrote in its report.
Globally, the IMF estimated 2015 growth at 3.1 per cent, down from 3.3 per cent in July and 3.8 per cent a year ago. For 2016, the outlook is only mildly improved, with growth forecast at 3.6 per cent, down from 3.8 per cent in July.
The agency highlighted the still-evolving impact of the slump in resource prices on many typically high-growth developing and emerging economies, as well as some commodity-export-heavy advanced countries such as Canada, Norway and Australia.
"In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging-market and developing economies," the report said.
"Commodity prices have weakened, particularly in recent weeks," it noted. "After increasing in the spring from their January trough, oil prices have declined sharply … Metal prices have also fallen on concerns about global demand, especially the slowdown in commodity-intensive investment and manufacturing activity in China."
"Some pickup in growth is expected in 2016 (especially in North America), but medium-term prospects remain subdued, reflecting a combination of lower investment, unfavorable demographics and weak productivity growth," the report said. "Growth prospects in emerging markets are very different across countries and regions, but the outlook is generally weakening, with growth projected to decline for the fifth year in a row."
The uninspiring outlook for Canada contrasts with recent economic data, which suggest that after a five-month growth slump to start the year, the economy has turned a corner. Strong GDP numbers for June and July have led many forecasters to suggest the Canadian economy expanded at an annualized pace of as much as 3 per cent in the third quarter. But others have warned that the renewed weakness in oil and other commodities, coupled with the continuing investment drought that the oil shock delivered to the energy sector, could make the third-quarter rebound hard to sustain.
The IMF forecasts for this year and next are also at odds with the economic assumptions the Harper government has used in drawing up their balanced-budget plans in last spring's budget. At the time, the government relied on average private-sector GDP growth forecasts of 2 per cent for 2015 and 2.2 per cent for 2016 in calculating its revenue estimates. If the IMF's latest outlook proves closer to reality, the government's revenues could prove well short of the budget projections.