The International Monetary Fund has grown more pessimistic about Canada's economic fortunes despite the economy's fast start to the year, as the agency further reduced its growth forecasts, citing the continuing damage in the energy sector and a dimmer global outlook.
In its World Economic Outlook released Tuesday, the IMF cut its projection for Canadian real gross domestic product growth to 1.5 per cent in 2016, from 1.7 per cent in its previous quarterly forecast update in January. It trimmed its 2017 growth forecast to 1.9 per cent from 2.1 per cent.
"Commodity-exporting advanced economies continue to adjust to reduced income and resource-related investment," the IMF said in its report.
For Canada specifically, the agency cited "the drag from the energy sector, offset partially by a more competitive currency and an expected increase in public investment," as the key factors in its 2016 forecast.
It's the sixth straight quarter in which the IMF reduced at least part of its two-year Canadian growth outlook – reflecting the severe slump in global commodity prices, especially oil, that has taken place over that same stretch.
The IMF's forecasts for Canada largely echo the most recent outlook issued by the Bank of Canada, in January, when it pegged real GDP growth at 1.4 per cent for 2016. However, strong Canadian economic indicators since that time have largely improved private-sector forecasts for Canadian growth this year. Bank of Canada is widely expected to upgrade its forecasts when it issues its quarterly Monetary Policy Report on Wednesday, reflecting both the improved growth trajectory and the increased government spending announced in last month's federal budget.
Private-sector economists believe the Canadian economy expanded at something close to a 3-per-cent annualized rate in the first quarter, and many now expect growth of close to 2 per cent for all of 2016, well above the new IMF forecast. The bank's January projection for 2017, at 2.4 per cent, is already considerably brighter than the IMF's view.
The cut of the IMF's Canadian outlook was just part of the agency's global downgrade of growth expectations for this year and next, marking a fourth straight quarter that its world view has dimmed. It now sees global real GDP growing 3.2 per cent in 2016, down from 3.4 per cent in its January forecast and from 3.8 per cent a year ago. It also trimmed its 2017 call, to 3.5 per cent from January's 3.6 per cent.
"Global recovery continues, but at an ever-slowing and increasingly fragile pace," the report said. "The months since the last World Economic Outlook have seen a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market economies and lower-income countries."
The IMF cautioned that the sluggish and disappointing global growth, which has been a persistent problem ever since the 2008-2009 financial crisis, "has scarring effects that themselves reduce potential output and with it, consumption and investment."
"Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation," it warned.
However, it noted that economic and financial-market conditions have generally improved since early in the year, offering renewed hope that the global economy is headed for more stable footing.
"Financial markets in advanced economies have, at this writing, partially reversed their swoon of the first weeks of 2016," the report said. "Some improved data releases, a firming of oil prices, lower capital outflows from China, and decisions by major central banks have all contributed to improved sentiment. These developments are consistent with our central projection that growth over the next two years, while lower than we believed likely just a few months ago, will still be slightly higher than in 2015."
"Yet that outcome is far from assured. Significant downside risks remain," it warned.
The World Economic Outlook was released in advance of the IMF and World Bank spring meetings, which take place April 15-17 in Washington.