IMF Canada Report: No Need To Hike Rates Yet

A recent IMF Canada Report points to new growth.

The International Monetary Fund (IMF) says it expects the Canadian economy will continue to expand over the next two years, likely by 2.3 per cent this year and by 2.4 per cent in 2015.

Not too shabby, until you realize that it also projects that the global economy could grow by as much 3.6 per cent in 2014, jumping to 3.9 per cent the following year.

That drops Canada into third place behind the United States and the United Kingdom for growth among the Group of Seven industrialized countries, according to the fund’s latest quarterly outlook.

The latest report comes days before global finance ministers and central bankers gather in Washington in the hopes of resurrecting what continues to be a rather moribund world economy.

Weaker Than Expected Exports

The good news is that Canada should benefit from any U.S. resurgence, which would in turn boost exports, considering that the U.S. is its largest trading partner. A weaker dollar is also helping manufacturers recover some of their lost competitiveness over recent years.

But while exports will be stronger, they won’t be as strong as they could be were the country’s economy more competitive, the IMF says.

Exports matter not only because they affect so many jobs – as much as 23 per cent of Canadian jobs are linked to exports – but because businesses busy tapping foreign markets tend to be more productive and often pay higher wages.

Unfortunately, lower commodity prices, high household debt and an overpriced housing market will continue to be a drag on the country’s prospects, the IMF predicts. Commodity prices have fallen recently in the wake of weak Chinese trade data and disappointing Japanese numbers and this trend may continue.

Commodity Prices Seen Easing

Weaker commodity prices tend to crimp corporate profits, and could curb business investment. Canada, where commodities drive more than 20 per cent of the gross domestic product, will suffer if prices drop further.

While many Canadian businesses sport decent balance sheets, they’re still reluctant to expand their production capacities because of inadequate demand.

The truth is, growth in Canada is still heavily reliant on consumer spending and housing, both of which are being held back by steadily rising household debt levels. As a result,  Canada risks becoming one of the most heavily indebted countries in the world, according to some estimates.

While the Bank of Canada maintains the household debt situation has actually improved, the IMF feels it remains a major concern, preaching caution and highlighting house prices as “a key vulnerability.”

Interest Rates To Stay Low

Overall, the fund’s message to the Harper government is clear. Balancing the budget makes perfect sense as long as economic growth holds at about 2 per cent. But the central bank needs to be flexible here in case circumstances change, the IMF cautions, warning that Canada would not be immune from the spillover effect of a global slowdown.

For the moment, the Bank of Canada should keep its interest rates low and “needs to strike the right balance” between stimulating growth and driving too hard to realign the country’s books. And it needs to be even more vigilant as global forces continue to gyrate.

New risks to any global economic recovery remain persistently low inflation in the more mature economies, a weaker outlook for many emerging markets, and ongoing political tensions – particularly in the Ukraine, the IMF report says

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