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OTTAWA (Reuters) - Canada is in for even tougher economic times in the near future because of its reliance on international trade, particularly with the United States, the International Monetary Fund said on Wednesday.
Canada's banks, while displaying "remarkable stability" during the global financial crisis, may also come under increased pressure and face tighter credit conditions, the Washington-based lender said.
The world is buying fewer Canadian goods and commodity prices remain soft, hurting jobs and income. Businesses may further cut back investments, while prices remain low or fall.
"Downside risks predominate, including negative spillovers if the global environment worsens more than expected," the IMF said in the concluding statement of the report on its two-week mission to Canada in late February and early March.
Canada, which sells three-quarters of its exports to the United States, posted its first trade deficit in 33 years in December due to the ailing U.S. economy.
The Bank of Canada has predicted the economy will shrink 4.8 percent in the first quarter and expects it to start growing again in the third quarter.
Despite the bleak short-term outlook, the IMF said Canada is more resilient than most other major countries as it faces the crisis rocking the global economy because of its overall sound fiscal and monetary management, the stimulus plan it announced in January and an unusually robust banking sector.
The IMF threw its support behind the Conservative government's plan to spend C$40 billion ($31.2 billion) over the next two years on infrastructure, tax breaks and a host of other measures to jolt the economy back to life.
"The stimulus package is appropriately sized -- well above the fund's benchmark of 2 percent," it said.
But it said execution of the plan in coming months will be crucial if it is to buoy domestic demand during the recession.
Monetary policy has also been on the right track, the IMF said. The Bank of Canada has cut its interest rates by 4 percentage points to a historic low of 0.5 percent and has now opened up the option of using additional tools to expand the money supply, if needed.
The central bank should maintain loose monetary conditions as long as necessary. "Going forward, maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession," the IMF said.
Canada's banking sector -- ranked as the world's soundest by the World Economic Forum -- has less exposure to illiquid assets than its global counterparts and has benefited from a conservative regulatory regime.
However, the banks are not immune to the crisis.
"The coming credit cycle is likely to be challenging," the IMF said. "The economic downturn will pressure bank credit quality."
Mortgage delinquencies are rising, especially in Western Canada, where there had been a localized housing boom, and high household debt is a worry.
"In this context, pressures on banks may feed back into tighter credit conditions, dampening growth," it said.
Reporting by Louise Egan; Editing by Peter Galloway