November 27, 2013 / 3:03 PM / in 4 years

Canada's economy seen picking up in 2014, but rates on hold -IMF

TORONTO, Nov 27 (Reuters) - Canada’s economy should accelerate next year as a pick-up in the U.S. recovery boosts exports, although the Bank of Canada is unlikely 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, business investment is expected to strengthen, particularly spending on machinery and equipment, the IMF said in a report.

Investment in Canada’s key energy sector is also seen expanding, with greater reliance on rail transportation, and additional pipeline and refining capacity expected to reduce volatility in the price of Canadian heavy oil.

The expected contribution to growth from net exports and business investment should more than offset an anticipated weakening in the contribution from household consumption and residential investment as Canadians gradually reduce their high debt burdens and housing construction moderates.

The current tame inflation rate is expected to climb back to 2 percent by the end of 2015 as the existing slack in the economy is absorbed. The Bank of Canada’s main policy rate is projected to start increasing in early 2015, the report said, with monetary policy needing to remain accommodative until there are firmer signs that a transition from household spending to exports and investment is taking hold.

The Bank of Canada surprised markets in October by taking a more dovish stance on monetary policy after 18 months of saying rate hikes were on the horizon. The central bank has held its key interest rate at 1 percent since 2010.

Still, the risks to the IMF’s growth scenario are predominantly to the downside, with uncertainty around the forecasted improvement in the U.S. recovery next year, the multinational agency said.

Another political standoff south of the border over fiscal policy and a faster-than-expected increase in long-term rates as the Federal Reserve looks to wind down its economic stimulus could negatively affect the U.S. recovery, along with demand for Canadian exports. The United States is Canada’s largest trading partner.

The IMF also noted that protracted weakness in the euro zone economic recovery and lower-than-expected growth in emerging markets would hurt Canada’s export prospects.

Elevated house prices and household debt could amplify the impact to growth of these external factors and potentially trigger an unwinding of domestic imbalances and weaker household spending.

The report recommended that the need for extensive government-backed mortgage insurance should be re-examined over the long-run. While the current system has its advantages, it exposes the fiscal budget to financial system risks and might distort the allocation of resources in favor of mortgages, the IMF said.

Canada’s finance minister Jim Flaherty has intervened four times since 2008 to tighten mortgage restrictions and has said the government will act again if necessary.

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