On June 19, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation ^[1] with Canada. The 2019 Article IV focused on policies to secure sustainable growth and a resilient financial system.

Growth has slowed to a more sustainable level following the stellar pace set in 2017. Several rounds of macroprudential measures, provincial and municipal tax measures, and tighter monetary policy have contributed to a reduction in housing-related financial stability risks. Private consumption and residential investment have decelerated, and a slowing global economy and low oil prices have dampened exports and business investment. A deal to overhaul NAFTA has been signed and awaits legislative approval, but trade tensions between the U.S. and its major trading partners continue to cast a shadow over the outlook.

Real GDP growth is projected to slow to 1.5 percent in 2019 and rise again in 2020 as the effects of a temporary slowdown in oil-related activity fades. Demand for exports will be supported by a robust U.S. economy and reduced uncertainty related to the approval of USMCA, contributing to a narrowing of the current account deficit. Business investment is expected to benefit from the new federal tax provision on investment expensing, while oil pipeline constraints will continue to weigh on investment in the energy sector. Over the medium-term, weak external competitiveness, low productivity growth, and population aging will limit potential growth to around 1.7 percent.

Risks to the outlooks are tilted to the downside. A key domestic risk is a sharp correction in the housing market, particularly if accompanied by a rise in unemployment and a collapse in private consumption, which could spark additional risks to financial stability and growth. External risks include a larger-than-expected global growth slowdown, a sharp tightening of global financial conditions, or an escalation of trade tensions between the U.S. and its major trading partners, which could include USMCA failing to get legislative approval. Against this backdrop, Canada should persevere with policies that preserve financial stability and focus efforts on supporting long-term growth.

Executive Board Assessment ^[2]

Directors commended the Canadian authorities for their sound management of the economy and progress in reducing financial sector vulnerabilities. They noted that growth has slowed to a more sustainable level and inflation is well contained. The economic outlook is nevertheless susceptible to risks, including from housing market imbalances, high household debt, and continued trade tensions. Going forward, it would be important to rebuild policy buffers, preserve financial stability, and boost productivity and competitiveness.

Directors agreed that fiscal consolidation should remain gradual and growth-friendly. They welcomed the authorities’ commitment to preserve Canada’s low debt advantage and recommended using unexpected fiscal savings to reduce deficit and debt. They encouraged provinces with high deficits or high debt to make the necessary fiscal adjustment. Many Directors saw the benefits of well-designed fiscal rules in strengthening the credibility and transparency of the fiscal framework, although a number of Directors noted that, given Canada’s sound fiscal management, an explicit fiscal rule has limited value added and could limit the ability of fiscal policy to respond to shocks. Directors concurred that if downside risks materialize, automatic stabilizers should be allowed to operate fully. They welcomed ongoing efforts to review key elements of the tax system, with a view to enhancing its efficiency and competitiveness.

Directors supported the current accommodative stance of monetary policy. Given the balance of risks and uncertainty around the outlook, they agreed that monetary tightening should proceed with caution, guided by incoming data.

Directors noted that macroprudential measures have mitigated housing-related risks to financial stability. They encouraged the authorities to stand ready to adjust macroprudential tools if needed, and to harmonize provincial and municipal tax measures into broad-based tax measures targeted at speculative activity more generally. Supply-side policies to improve housing affordability would help address housing imbalances on a more durable basis.

Directors welcomed the assessment that the overall financial system is healthy and resilient. They also noted that the informal framework for systemic risk surveillance and crisis management has served Canada well. While acknowledging that there is no one-size-fits-all solution, Directors encouraged continued efforts to modernize the arrangement, and strengthen microprudential oversight and safety nets along the lines of the FSAP recommendations. They welcomed Canada’s voluntary participation in the Fund’s enhanced governance framework on the supply and facilitation of corruption. They looked forward to further progress on strengthening the AML/CFT and anti-foreign bribery frameworks.

Directors welcomed the authorities’ commitment to trade diversification and free trade. They commended Canada for leading an international effort to improve the multilateral trade system and for rapid ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Directors encouraged all levels of government to work together to continue reducing internal trade barriers and better facilitate infrastructure investment.

Directors stressed the importance of boosting long-term growth. They supported recent initiatives to promote a more productive workforce, a more competitive business environment, and greener infrastructure.