The International Monetary Fund (IMF) has issued a warning about Canada's economy, saying the country faces “significant risks” due to trade tensions with the U.S. and the threat of a correction in the housing market.
In its latest outlook, the Washington-based IMF said that policymakers in Canada need to “rebuild policy buffers” and forge ahead with structural reforms to boost Canada's global competitiveness. Failure to due so could result in Canada's Gross Domestic Product (GDP) falling by 0.4 percentage points or more, the agency concludes.
One of the biggest blows to Canada’s economy could come if the U.S. and Canada fail to reach a new NAFTA agreement and trade between the two countries reverts back to World Trade Organization (WTO) rules, the IMF said in a written statement.
“Over the medium-term, weak external competitiveness, sluggish labour productivity growth, and population aging are expected to limit potential growth to about 1.75%, significantly lower than its historical average,” said the IMF.
The warning from the IMF comes as trade tensions between Canada and its closest neighbour reach a fever pitch after the U.S. slapped aluminum and steel tariffs on Canadian imports. The Canadian government has retaliated with surtaxes of its own on $16.6 billion worth of U.S. goods. The IMF said external risks to Canada's economy are now “more acute” than in the past as a result of policy changes in the U.S., along with the fallout from the recent NAFTA talks.
Meanwhile, a key domestic risk to the economy is the potential for a “sharp correction” in the housing market that could be triggered by a faster-than-expected rise in mortgage interest rates.
“While the banking system is profitable, it is heavily exposed to household and corporate debt,” the IMF said. “In this context, risks to financial stability and growth could emerge, if the house price correction is accompanied by a rise in unemployment and sharp contraction in private consumption.”
Data from the Toronto Real Estate Board on Monday showed that home sales in Canada's largest city — the Greater Toronto Area — fell more than 22% in May, compared to last year. The Real Estate Board of Greater Vancouver said that home sales in Metro Vancouver — the country's most expensive property market — fell more than 35% in the same period.
