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IMF sees Canadian economy outperforming peers

The International Monetary Fund says Canada’s economic growth has slowed after the brief boom of 2010, but we will perform better than many of our peers in the next year or so.

In a preliminary report based on its annual review of the Canadian economy, the IMF said growth will be roughly two percent in both 2011 and 2012, despite risks that emanate from outside the country - weak demand from our trading partners, a strong dollar, and fiscal retrenchment around the world.

The IMF’s projections are similar to those of the Bank of Canada, which said last week that the country will likely face a year of sluggish growth.

“Broadly Canada is doing well, especially given the circumstances,” said Gian Maria Milesi-Ferretti, assistant director of the IMF’s North American division.

The reason the growth forecasts are so moderate, he said, is “a very unsettled external environment that tends to weigh on demands for Canadian products.” The risk of turmoil in Europe is dampening both consumer and business confidence, he added, and there are concerns that commodity prices could weaken.
 
IMF officials came to Canada for two weeks in mid-October to consult with government officials and the private sector to take the pulse of the Canadian economy. Their preliminary report released Monday will be followed by more detailed projections in December, after the full IMF board considers reports from around the globe.

One of the key challenges that Canada faces in the coming years, Milesi-Ferretti said, is how to get back to a more “normal” interest rate position after years of rock-bottom rates. The budget deficit also needs to be reduced, and the country needs to deal with upward pressures on health spending, he said.

The high level of household debt in Canada, and high house prices, are also concerns, he said. If some kind of an “external shock” pushed house prices down, household balance sheets could be stretched.

While Canadian businesses have little direct exposure to troubled European economies, he said, Canada would certainly not be immune if there is a global slowdown resulting from a credit crisis in Europe.
 
Over all, Canada suffered less than other G7 countries during the 2008-2009 financial crisis, and this is remarkable given our dependence on U.S. markets, Milesi-Ferretti said said.

One reason for our relative success is our “resilient and well-supervised” financial system,” he said, along with credible financial policies from the government and the Bank of Canada. Our quick recovery was also due to the rapid rise of commodity prices after the crisis, the IMF said.

Still, with so much uncertainty facing the world economy, Canada needs to remain flexible in case things deteriorate, the IMF report said. Fortunately, the Bank of Canada has some room to reduce interest rates slightly and take other fiscal measure. And if domestic demand falls sharply, “stimulus may become appropriate,” the report says.

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