Canada economy to slow, risks to downside - IMF

Mon Feb 25, 2008 12:14pm EST
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OTTAWA (Reuters) - Canadian economic growth will slow to 1.8 percent this year and there is a risk of an even sharper downturn as weakness in the U.S. economy spreads beyond the housing sector, the International Monetary Fund said in a report on Monday.

After growing about 2.5 percent in 2007, Canada's healthy economy and fiscal standing will help it withstand the global turbulence but external risks will pose a challenge.

"The balance of risks to growth is tilted to the downside," the Washington-based lender said in its annual report on Canada.

"With U.S. weakness through the third quarter (of 2007) primarily reflecting a housing downturn, spillovers have continued to be limited," the report said. "As the U.S. slowdown broadens to consumption, it is likely to generate more general trade effects."

The IMF said the Canadian dollar at near parity with the U.S. dollar was an appropriate market value, reflecting the strong economy and high commodity prices. Some measures suggest it is slightly overvalued, it noted.

"The Canadian dollar has fallen from November's record high against the U.S. dollar, when it was modestly overvalued by most measures," it said.

The Canadian dollar has appreciated 45 percent since 2002. It hit parity with the U.S. dollar last September for the first time in three decades, and continued to climb to a modern-day high of about US$1.10 in November before easing.

The currency has moved within a range close to parity for the past several weeks.

Canada's adjustment to the currency's rise has been "remarkably smooth" due to its flexible labor market, it said.   Continued...