Washington DC, July 16, 2024
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Canada.
The Canadian economy appears to have achieved a soft landing: inflation has come down almost to target, while a recession has been avoided, with GDP growth cushioned by surging immigration even as per capita income has shrunk. Housing affordability has reached its worst levels in a generation, with housing supply unable to fully meet growing demand. Meanwhile, the financial sector remains resilient, with banks well capitalized and liquid, although data gaps preclude a more definitive assessment of nonbank financial institutions.
Real GDP growth is expected to pick up slightly this year, supported by the recently initiated normalization of monetary policy, some easing of fiscal policy, continued (even if slowing) immigration, and the expansion of the Trans Mountain pipeline. Inflation is set to continue declining, reaching the 2-percent target by early 2025.
Risks around the baseline forecast are broadly balanced. An abrupt global slowdown could dampen Canadian growth and inflation alike, while tighter financial conditions could negatively affect the outlook. On the other hand, labor market resilience and stronger-than-anticipated US demand could lead to a stronger growth outlook.
Executive Board Assessment[2]
Executive Directors commended the authorities for their strong track record of sound policies and concurred that the Canadian economy appears to have achieved a soft landing, while inflation has declined to near target levels. They welcomed the expected pickup in growth in 2024 and considered risks to be relatively balanced. Directors noted important structural challenges, including relatively low productivity growth and the deterioration of housing affordability, which require ambitious and proactive policy efforts.
Directors welcomed the Bank of Canada’s (BoC) decision to begin lowering policy rates in June, following its effective management of inflationary pressures in previous years. They emphasized that further rate cuts should continue to be carefully calibrated and data dependent, with the monetary policy stance remaining restrictive for a while. Noting important improvements in the BoC’s communication strategy, Directors broadly supported additional enhancements to further improve BoC’s monetary policy effectiveness.
Directors commended the Canadian authorities for their prudent fiscal policy in international comparison, with Canada enjoying a AAA rating. They broadly considered that a somewhat tighter stance this year would support efforts to reduce inflation and rebuild buffers. Directors welcomed the introduction of quantitative fiscal objectives and most suggested that adoption of a formal fiscal framework would help anchor policy even more effectively. Continued coordination between fiscal and monetary policy remains imperative.
Directors agreed that the financial system remains resilient, with sufficient buffers to weather the repricing of low‑interest, pandemic‑era mortgages. They emphasized the need for continued vigilance and for efforts to address data gaps for nonbanks, including through enhanced federal‑provincial supervisory cooperation. Welcoming recent progress, Directors supported continued efforts to strengthen the AML/CFT framework. They also encouraged continued implementation of the 2019 FSAP recommendations and looked forward to the 2025 FSAP.
Directors emphasized that boosting productivity growth is key for Canada’s long‑term prospects. They agreed that harnessing advanced technologies, reducing interprovincial barriers to trade, fully integrating immigrants into the labor market, and increasing female labor force participation (for instance, via the authorities’ affordable childcare program) are key for strengthening living standards. Directors supported the authorities’ actions to boost housing supply, while acknowledging that further efforts at all levels of government would be needed to close the sizeable housing gap.
On the climate front, Directors stressed that carbon pricing is the most cost‑effective way to achieve Canada’s ambitious climate goals. They acknowledged that green industrial policies could play a role but urged that care be taken to avoid trade distortions and to maintain a level playing field for all companies.
Country Report No. 2024/228 : Canada: 2024 Article IV Consultation-Press Release; and Staff Report
Source – IMF