On July 5, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Canada. The 2017 Article IV consultation centered on policies to secure stronger, inclusive, and self-sustaining growth, while preventing the further build-up of housing market imbalances.

The economy has regained momentum, supported by the authorities’ pro-active growth strategy, but complex adjustments are still at play. While personal consumption is robust, business investment remains weak, non-energy exports have underperformed, and housing market imbalances have risen. Externally, the global outlook has improved, but uncertainty surrounding global trade and risks of economic fragmentation may negatively affect the durability of the Canadian recovery.

The positive momentum in the economy is expected to continue in the near term. A strong U.S. economy, expansionary fiscal and monetary policy, and stable oil prices are expected to lift real GDP growth to 2.5 percent in 2017 and 1.9 percent in 2018. Residential construction is expected to expand at a more moderate pace, reflecting tighter macroprudential measures. The increase in exports and stable domestic demand will generate growth in business investment and, along with an increase in national savings, narrow the current account deficit to 3 percent of GDP by 2018.

The medium-term outlook is less upbeat because of structural impediments. Weak external competitiveness, low labor productivity growth, and population aging are expected to limit potential growth to about 1.8 percent, below the recent average of 2.6 percent.

Risks to the outlook are significant. On the upside, stronger-than-expected growth in the U.S. could boost export and investment in the near term. On the downside, risks stem from several potential factors—including the risk of a sharp correction in the housing market, high uncertainty surrounding U.S. policies, or a further decline in oil prices—that can be mutually reinforcing. Policy choices will therefore be crucial in shaping the outlook and reducing risks.

Executive Board Assessment [2]

Directors commended the authorities for successfully reinvigorating the Canadian economy, although they noted that the ongoing recovery is skewed toward consumption. At the same time, there are uncertainties around the economic outlook.

Directors agreed that fiscal policy should be geared toward ensuring that the cyclical recovery is secure and inclusive. The fiscal stance should remain expansionary in 2017, while in 2018, as the output gap closes, no further increase in the deficit would be required. Directors noted that if downside risks materialized, additional fiscal stimulus should be the first line of defense. At the provincial level, fiscal consolidation should continue but at a gradual pace. Directors emphasized that maintaining fiscal discipline over the medium term will be important. They welcomed the authorities’ commitment to set debt‑to‑GDP on a declining path, and some Directors called for the reinstatement of a fiscal rule once the economy stabilizes around its potential.

Directors agreed that monetary policy should stay accommodative and be gradually tightened as signs of durable growth and inflation pressures emerge. They recognized that monetary easing could complement fiscal stimulus, and may need to be considered along with unconventional measures if economic activity contracts significantly, although there is a risk that it could exacerbate housing imbalances.

Directors agreed that the proposed Canada Infrastructure Bank (CIB) would help foster long‑term growth. Its success would depend on ensuring a transparent project selection process that balances public and private interests. Communicating clearly the CIB’s benefits could help persuade the public of the need for user fees and the involvement of the private sector in public infrastructure.

Directors noted that Canada’s financial sector is well capitalized and has strong profitability, but that there are rising vulnerabilities in the housing sector. In this regard, Directors generally encouraged the authorities to consider a further tightening of macroprudential and tax‑based measures to protect the resilience of the household and banking sectors. Directors also encouraged the federal and provincial governments to continue to work collaboratively in addressing housing issues.

Directors took note of the differences in view between the staff and the authorities regarding the characterization of the provincial property transfer taxes on non‑residents. Many Directors noted that the taxes did not have the objective to restrict capital flows and their effect on aggregate capital flows is likely minimal. While taking note of the staff’s explanation that, under the Institutional View on the liberalization and management of capital flows, the taxes would be considered capital flow management measures, some Directors felt that the measures appeared justified in view of the stated intent to address housing affordability concerns. Many Directors pointed to the practical challenges involved in analyzing borderline cases and formulating appropriate policy advice. In this context, a number of Directors urged staff to assess the benefits and costs of alternative macroprudential and tax‑based measures vis‑à‑vis competing policy objectives.

Directors agreed that revitalizing productivity is key to boosting Canada’s long‑term growth. Structural policies should be transparent, well targeted, create an “innovation‑ and competition‑friendly” business environment, and implemented in coordination between federal and provincial authorities. A holistic review of the tax system would help assess the scope for improving efficiency, while maintaining Canada’s tax competitiveness. More could also be done to reduce FDI restrictions and regulatory barriers to entry in key sectors of the economy.

Directors agreed that diversifying Canada’s export markets would facilitate its integration into global supply chains. They commended the Comprehensive Economic and Trade Agreement with the EU and encouraged Canada to pursue closer trade integration with Asia.