IMF headquartersTIM SLOAN
Canada's household debt burden, now as heavy as that of the United States, represents a significant threat to the country's economic recovery, the International Monetary Fund says.
Sounding a note of alarm, the Washington-based IMF used its latest review of Canada's economy to highlight the risks that come with Canadians' record levels of mortgage debt, credit-card debt, lines of credit and other liabilities. Statistics Canada said last week that the ratio of household debt to disposable income reached 148.1 per cent in the third quarter.
That is nearly identical to the figure in the U.S., where elevated debt levels triggered the worse economic downturn since the Depression.
On one hand, the rise in Canadian household debt is a positive: It's a testament to the effectiveness of the efforts of the Bank of Canada and federal and provincial finance departments to stimulate spending that offset the collapse in demand for exports during the financial crisis.
But now, household debt is emerging as one of the biggest short-term risks facing a recovery that the IMF describes as "gradual."
There are two main challenges for policy makers. First, they must keep debt from rising to a point that it triggers a wave of defaults that would hobble lenders and impair the financial system. The IMF suggests that Canada's household debt may have peaked, which leads to the second challenge. Tapped out, consumers will naturally reduce spending. If exports and business investment fail to make up for reduced household consumption, economic growth will slow.
The IMF predicts Canada's gross domestic product will expand 2.3 per cent in 2011 after growing 3 per cent in 2010. That's weak for a recovery by historical standards and suggests Canada's economy is at the mercy of its trading partners, which must continue to buy exports and push up commodity prices for the country to get back on a firm footing.
"Growth is expected to be muted in the second half of 2010 and 2011 as household debt has run up to high levels, housing markets are cooling and fiscal stimulus is wanting," the IMF report says. "Risks are tilted to the downside, with a key risk that the global recovery stalls."
Speaking to reporters on a conference call, Charles Kramer, the IMF's mission chief to Canada, praised the Bank of Canada and the Finance Department for their handling of the financial crisis. The central bank was wise to stop its campaign of raising interest rates, and the federal government did well by extending the deadline to spend infrastructure money and to resist raising payroll taxes, the fund said.
The central bank can afford to lower borrowing costs and the federal government has the "fiscal room" to delay its plan to balance the budget if the outlook for economic growth deteriorates, Mr. Kramer said. The Bank of Canada should be the first to act, but Ottawa could respond to weaker growth by advancing planned infrastructure spending, cutting corporate taxes earlier than scheduled, or both, the IMF report says.
Underscoring Canada's uncertain prospects, government data released Wednesday showed the U.S. economy grew at an annual rate of 2.6 per cent in the third quarter, too slow to reduce the country's unemployment rate of 9.8 per cent.
The U.S. Commerce Department's final estimate of third-quarter GDP also fell short of the expectations of most Wall Street economists, who expected a growth rate of 2.8 per cent, according to Bloomberg News survey.
Canada has little hope of engineering a strong recovery without the help of the U.S. because the American consumer and business purchase 75 per cent of Canadian exports, the IMF said.