In a report released yesterday, IMF noted that the 3% growth in 2017 in Canada was the highest among G7 nations in the year. But going ahead, the economic outlook is subject to “significant risks, domestic and external”.
Domestically, a key risk is sharp correction in the housing market. That could be triggered by a “sudden shift in price expectations or a faster-than-expected increase in mortgage interest rates”. And, the banking system is “heavily exposed to household and corporate debt.” Thus, if housing correction is accompanied by rise in unemployment and sharp contraction in private consumption, “risks to financial stability and growth could emerge”.
Externally, the medium term impact of US tax cuts could make Canada a “less attractive destination for investment”. Failure to reach a NAFTA agreement within a reasonable timeframe could impact investment and growth for an “extended period”. And return to WTO rules could cut GDP growth by -0.4%. Other external risks include weaker growth in key advanced economies, sharp slowdown in China, tighter global financial conditions.
Regarding monetary policy, IMF said BoC should tighten “gradually” as “inflationary pressures are building and higher interest rates will help activity and inflation converge toward more sustainable levels.” But the current balance of risks warrants “gradual policy normalization.”
Full report here.
