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Slower wage, house-price growth to weigh on Canadian economy in 2018: OECD

A home for sale in a Toronto neighbourhood.

Marcus Oleniuk/The Globe and Mail

Canada's economy is headed for much slower growth in 2018 and beyond as consumers react to sluggish wage growth, higher interest rates and a cooler housing market, the Organization for Economic Co-operation and Development says.

The economy will grow 2.1 per cent in 2018 and 1.9 per cent in 2019, down from 3 per cent this year, the OECD said in a forecast released on Tuesday that roughly mirrors those of the Bank of Canada and private-sector economists.

"Recent strong private consumption gains have not been supported by commensurate increases in wages and thus are set to ease with further interest rate rises, slowing job growth, the absence of further substantial increases in government transfers and house price appreciation that is assumed to return to a more historical average annual rate of around 3 per cent in real terms," the report said.

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The OECD, of which Canada and 34 other major developed countries are members, also said that exports would continue to be sluggish over the "next few quarters" owing to a stronger Canadian dollar, now at roughly 78.5 cents (U.S.).

The OECD likewise expressed concern about the possible demise of the North American free-trade agreement as well as the recent imposition of U.S. countervailing duties on key Canadian exports, including commercial jets and softwood lumber.

The report warns that Canada's growth would take a much bigger hit if there was a "disorderly housing market correction." That would lead to weaker housing investment, undermine household wealth and weigh on consumer spending.

"A sufficiently large shock could even threaten financial stability," the report said.

On the other hand, if house prices and household debt resume climbing, Ottawa will need to take further action to cool the market, the OECD said.

The report generally applauds the various measures Ottawa and the provinces have deployed to discourage housing speculation and risky borrowing, including stricter mortgage rules. But the OECD takes a swipe at the Ontario government's expansion of rent controls, which it said "risks discouraging the supply of new housing."

The OECD expects further interest-rate hikes from the Bank of Canada as the central bank tries to hold inflation near the midway point of its target of 1 per cent to 3 per cent. The bank has already raised its benchmark overnight rate, which sets the trend for mortgages and other loans, twice this year. The rate now stands at 1 per cent.

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The consumer price index is forecast to be 1.5 per cent this year, 1.9 per cent in 2018 and 2 per cent in 2019, according to the OECD.

The OECD also called for "policy action" by governments in Canada to address gaps in affordability and quality of daycare, which have led to a large gender-pay gap.

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