"Exemplary" Canada at risk from Europe, housing: IMF

Thu Dec 22, 2011 2:10pm EST
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By Claire Sibonney

TORONTO (Reuters) - Canada's economy should grow modestly next year, but problems abroad could threaten its strong banks and the government may need to act if there's a further rise in already record levels of housing prices and household debt, the International Monetary Fund said on Thursday.

In a report that praised Canada's "exemplary" fiscal and monetary policies, the multinational agency said it expects real economic growth to slow to 2.2 percent in 2011 and 1.9 percent in 2012. But the spillover of the European crisis on financial markets and global growth remains a major risk.

"Direct trade linkages with Europe are there. They're not very large so we would not expect a very large impact from a decline in European demand for Canadian product," said Gian Maria Milesi-Ferretti, IMF Mission Chief to Canada.

"More of concern are the potential global financial market repercussions of turmoil in Europe and there is a lot of uncertainty about that."

The IMF approved of the Bank of Canada's current accommodative stance - its key interest rate sits at a below-inflation 1 percent - but noted there is scope for further monetary easing if the economy weakens.

It also applauded the Canadian government's plan to balance its budget in the medium term, but said there was room for further stimulus if the economy ran into trouble. IMF officials noted Canada has the scope to respond flexibly, including allowing the deficit to automatically widen.

Provincial governments, many of which borrowed heavily to cope with the recession, need to move ahead with fiscal consolidation.

The IMF warned that high household debt levels and elevated house prices are the main domestic vulnerability, the same risks it cited a couple months ago.   Continued...