IMF warns of risks to Canada’s muted growth

There are big risks to Canada's economy as the recovery slows and officials should be ready to take additional steps to safeguard growth if necessary, the International Monetary Fund said on Wednesday.
The IMF forecast modest growth for this year and next, in line with the Bank of Canada. But it warned of the risks to that outlook, suggesting the federal government should not rush to balance its budget too quickly and that the central bank should keep interest rates low.
Both the government and the bank have room to maneuver should the global economy worsen, it said.
"Growth is expected to be muted in the second half of 2010 and 2011 as household debt has run up to high levels, housing markets are cooling and fiscal stimulus is waning," the Washington-based lender said in its staff report on Canada.
"Risks are tilted to the downside, with a key risk that the global recovery stalls."
The Canadian dollar is "on the firm side," but not significantly overvalued, the IMF said. But there is a chance that Canada's higher interest rates could attract capital from other low-rate markets and add upward pressure on the currency. The Fund called that scenario "a particular concern in an environment of sustained global monetary accommodation."
The report is based on discussions with Canadian officials that ended October 27. The Canadian dollar jumped to parity with the U.S. dollar in April of this year. Since October it has flirted with parity a handful of times, trading within a broad range around that level.
The IMF said the Bank of Canada should keep its interest rate low and in the case of a global shock to the economy, it should be the first to respond with a rate cut.
"Monetary policy should be the first line of defense if the outlook deteriorates, given the room to ease quickly, although fiscal policy has room to respond as well in a downside scenario."
The Bank of Canada raised its overnight lending target three times this year but held the rate steady at 1% since September, pending signs the recovery is entrenched.
The IMF said the government could have taken a more gradual approach to tackling the fiscal deficit, to soften the impact on growth. The government has the option of speeding up infrastructure projects and changing the timeline for planned corporate tax cuts to help ease the transition, it said.
The IMF predicted gross domestic product growth this year of 3%, slowing to 2.3% in 2011.