The Economy

IMF Slashes Canada's Growth Outlook on U.S. Slowdown

Feb. 25, 2008

Domestic demand will remain solid but the problems of its Northern neighbor will spill over.

The International Monetary Fund (IMF) on Feb 25 slashed a half point from its 2008 Canadian economic growth forecast, to 1.8%, mainly due to a weakening U.S. economy. Despite a sharp slowdown in the final quarter of 2007, the Canadian economy expanded by around 2.5% for the full year, buoyed by nearly four percent growth in domestic demand, particularly private consumption and residential investment, the IMF said in a report on Canada.

However, rapidly deteriorating conditions in its neighbor to the south, where a severe housing slump and a related credit squeeze have nearly stalled the U.S. economy, have affected Canada, the IMF said. "Growth slowed toward the end of the (2007) year, and is expected to decelerate further to 1.8% in 2008 reflecting a sharp downturn in the U.S., past currency appreciation, and a tightening of financial market conditions," the IMF said in a report on Canada. Nevertheless, "domestic demand would likely remain solid," it said, noting "Canada's impressive macroeconomic track record since the mid-1990s, which has been underpinned by sound monetary and fiscal policies and favorable external conditions."

In October, Ottawa announced it would cut the federal debt by $10 billion dollars (Canadian) in fiscal 2007-2008, ending March 31 of this year, and by at least three billion dollars each year subsequently. On March 31, 2007, Canada's national debt dropped to $467 billion dollars, or 32% of gross domestic product (GDP), compared to 68% a decade ago. Ottawa has pledged to reduce the debt-to-GDP ratio to less than 25% by 2011-2012.

The Canadian dollar has appreciated by 45% in real effective terms since 2002, the IMF said, noting that "domestic adjustment to the appreciation has been very smooth thanks to the flexible labor markets."

The IMF also welcomed Canada's "recent measured easing" of monetary policy -- two quarter-point interest rate cuts, in December 2007 and January 2008 -- saying the country's "strong monetary framework, as well as exemplary budgetary performance, have provided room for supportive policy actions."

In recent days, the IMF has cut a half point off its 2008 growth estimates for Germany and France, to 1.5%. In January it trimmed 0.4 percentage points from its forecast for the U.S. to 1.5%.