IMF sees Canada's near-term outlook challenging

Fri May 22, 2009 11:42am EDT
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WASHINGTON (Reuters) - Canada's strong policy framework and proactive response have put it in a better position than most countries to deal with the global financial crisis, but the country's near-term economic outlook remains an issue, the IMF said on Friday.

"The near-term economic outlook will be challenging in light of the sharp deterioration in the global environment and Canada's strong international linkages," the International Monetary Fund said in a report.

The Fund sees risks, including ones from macro-financial linkages, as tilted to the downside and urged continued vigilance, given what it described as the "challenging credit cycle underway."

Canada's financial sector has been little affected by the global credit squeeze, and no bank has required government capital injections or guarantees.

"Vigilance will be particularly warranted with regard to exposures to commodity-affected sectors, non-banks such as insurers and pension plans, and highly indebted households, with a special focus on cross-institution spillovers," the IMF report said.

"Consolidation of securities regulation pursued by the government would further strengthen the framework for preserving financial stability."

The Fund also said Canada was well placed to participate in a further, internationally coordinated, stimulus effort, if warranted, saying that this would not put debt sustainability at risk.

The IMF repeated its earlier forecasts, which see the Canadian economy shrinking 2.5 percent in 2009, with gross domestic product growth expected to rise to 1.2 percent in 2010. The country's unemployment rate was forecast at 8.4 percent in 2009 and rising to 8.8 percent next year.

The IMF also noted that its staff's assessment of the Canadian dollar was broadly in line with economic fundamentals, as the currency has weakened with the decline in commodity prices.

(Reporting by Lucia Mutikani; Editing by Padraic Cassidy)