IMF sees Canada economy picking up in 2014, rates on hold

Wed Nov 27, 2013 2:13pm EST
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By Leah Schnurr

TORONTO (Reuters) - Economic growth in Canada should accelerate next year as a pick-up in the U.S. recovery boosts exports, but low inflation means the Bank of Canada can wait to raise interest rates until early 2015, the International Monetary Fund said on Wednesday.

The IMF sees Canada's economic growth accelerating to 2.25 percent in 2014 from an estimated 1.6 percent this year. While household consumption has remained robust this year, growth in exports and business investment has disappointed.

As demand and capacity utilization increase next year, business investment is expected to strengthen, particularly spending on machinery and equipment, the IMF said in a report.

"Twelve months ago we were expecting the economy to accelerate over 2013. I have to say, that hasn't happened to the extent to which we were expecting," Roberto Cardarelli, IMF mission chief to Canada, told reporters.

"The culprit is especially exports, which have not picked up as much as we were expecting last year, and business investment, which has slowed over the last few quarters."

The Bank of Canada has also said it is looking for corporate investment and exports to contribute more to growth, picking up from highly indebted consumers who helped fuel the recovery from the financial crisis.

That rotation should happen next year, but hinges on a stronger U.S. recovery, said Cardarelli, who warned risks to the IMF's growth scenario are predominantly on the downside. The United States is Canada's largest trading partner.

Beyond lackluster demand for exports, obstacles hampering the sector include Canada's strong currency, weak productivity growth and capacity constraints in the energy sector, Cardarelli said.   Continued...

Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch