IMF lowers growth prediction for Canadian GDP in 2016 and 2017

Although the Canadian economy had a fast start this year the International Monetary Fund(IMF) has reduced its growth forecast. The IMF cited continuing damage to the energy sector and lower expected growth globally as reasons for the reduced prospects.

The IMF cut its projection for Canadian gross domestic product (GDP) growth to 1.5 percent in 2016. In the previous prediction last quarter in January, the outlook was for 1.7 percent. The outlook for 2017 was reduced from 2.1 percent to 1.9 percent. The IMF said commodity-exporting economies suffered from reduced income and reduced investment. In Canada, the energy sector was a drag, only partially offset by a lower loonie and an expected increase in public investment by the Liberal government.

This is the sixth straight quarter that the IMF has reduced part of its two-year Canadian GDP outlook. The decline in our growth outlook has reflected the slump in prices for commodities. The Bank of Canada also predicted lower growth in Canada in a January report at 1.4 percent. Private-sector economists have a rosier projection of our growth at least during the first quarter this year. They think that our growth was close to 3 percent on an annualized basis and expect our growth to be close to 2 percent for the year. The Bank of Canada's projection for the year in January was 2.4 percent well above that of the IMF.

The CIBC's most recent forecast for 2016 was at 3.2 percent, down from 3.4 percent in January and 3.8 percent a year ago. For 2017 it forecast growth at 3.5 percent down marginally from its January forecast of 3.6 percent.

The Organization for Economic Co-operation and Develoment (OECD) also downgraded its estimates for the growth in the Canadian Economy as well as those for other G7 countries. The OECD predicted that Canada's economy will grow by 1.4 percent this year and 2.2 percent in 2017.

The global outlook also was for weaker growth according to the IMF report:“Global recovery continues, but at an ever-slowing and increasingly fragile pace. The months since the last World Economic Outlook have seen a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market economies and lower-income countries...Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.”The report did note, however, that conditions had improved somewhat since earlier in the year. Oil prices were somewhat firmer, and capital outflows from China were lower, and some decisions by central banks were helping to improve sentiment about economic growth but downside risks remained. The IMF World Econonomic Outlook is released just prior to the spring meetings of the IMF and World Bank to take place in Washington April 15 to 17.

CMHC and others issue warnings about Canadian housing market

Canada Mortgage and Housing Corp.(CMHC) released an unsettling picture of what could happen if there were a severe correction in the Canadian housing market.

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The CMHC used a stress test or worst case scenario to test what would happen in the Canadian Housing market if there were a quite significant downturn in the Canadian market. The CMHC projected a 30 percent plunge in home prices and a 5 percent increase in unemployment. This is what happened in the U.S. in 2008 when its housing market imploded. In such a scenario the CMHC would be faced with eight times more insurance claims than now, with total claims of $5 billion over five years. The CMHC profit of $7.5 would swing to a $2.8 billion loss.

Many analysts think the CMHC scenario based on what happened in the U.S. is quite unlikely to happen here. Sal Guaterei, an economist at the Bank of Montreal (BMO), notes in the U.S. there was a huge problem with sub-prime borrowers, a situation that does not really exist in Canada. While Vancouver and Toronto would be vulnerable if there were sharply rising interest rates and rising unemployment, even this would require a considerable shock to the economy that seems not likely to happen.

The CMHC notes if there were global economic deflation for five years, this could hurt the market. Oil prices being very low, for example $35 a barrel, for a similar period would also rock the housing market. Many analysts are concerned about global deflation, with bond investor Bill Gross noting the global economy is approaching deflationary growth. The IMF has voiced a similar concern. While oil prices are projected to stay relatively low for some time, most analysts do not see them going as low as $35 a barrel for any length of time.

With deflation, house prices could fall, and people would lose money on their investment in their house if they sell. At the same time, if buyers think that prices will fall further they will not purchase homes new or otherwise, so that there will be less investment in new housing and falling house sales.

As well as the CMHC, the Canadian Centre for Policy Alternatives(CCPA) and the OECD have also issued warnings about the Canadian housing market, especially if there is a short-term downturn in housing prices. The present heated housing market is partly caused by the baby boom bulge that created a big demand. Things are now changing.

Ben Rabidoux, of North Cove Advisors, a research firm says: "One of the more concerning developments that no one's talking about is the demographic trend. We are adding the fewest number of people to the working age population that we ever have."The Bank of International Settlements notes that in an economy where more people are leaving the workforce than entering, as is starting to happen here in Canada, the economy as a whole begins to shrink and house prices are lowered as well, as older home owners put houses on the market. This trend happens when home owners reach between 60 and 70 years. The baby boomers are now beginning to enter that age range. In Alberta those older homer owners are often taking their homes off the market because they are not getting the prices that they want but others, because of their economic situation, may be forced to accept those prices. Builders of new houses will need to sell their houses to pay their expenses often at prices that yield little or no profit.

Rabidoux though does not predict possible doom for markets such as Toronto. Some housing will still attract good prices but others may not. He says some expensive homes built in rural areas are not likely to sell well but family-sized homes in popular city areas will attract those who can afford family homes since there is always a limited supply of these homes. As the boomers move out of homes the demand for larger condos in prime areas will remain strong. Rabidoux cautions however that his predictions have been wrong before.

The Canadian Centre for Policy Alternatives(CCPA) worries about the debt loads that high house prices place disproportionately on young people. The OECD has issued a warning specifically about the risk of a correction in Toronto which has seen a huge increase in condo development. The OECD pointed out that there are high debt-to-income levels in Canada and urged tightening of mortgage lending in overheated markets such as Toronto and Vancouver. The OECD said: "In Ontario, and especially Toronto, economic activity has been relatively buoyant and demand by foreigners has been boosted by the falling Canadian dollar. That said, newly completed but unoccupied housing units have soared in Toronto, increasing the risk of a sharp market correction."

The Bank of Canada estimates that Canadian house prices are 10 to 30 percent overvalued at present.

Sharply falling prices could badly hurt younger home owners says economist, David Macdonald, of the CCPA:"Declines in real estate prices would have a strongly disproportional impact on young home owners, If, or more likely when, real estate prices fall, families in their 20s and 30s can expect to lose a substantial portion of their net worth, and could find themselves owing more than their house and other assets are worth."

He points out that the debt-to-income ratio for people in their thirties is now at a new high of 4 to 1 about double what it was in 1999. This is a higher ratio than in any other age group.

Macdonald offered some numbers to back his views. Even if the housing correction is in the mid-range of what the Bank of Canada has projected that families with people in their thirties would lose on average $60,000 or close to 40 percent of their net worth. One in ten families with people in their thirties or younger would end up with negative net worth. Macdonaldconcludes: "In cities with higher prices, like Toronto, Vancouver and Calgary, young families would likely see declines in net worth dramatically worse than the national average due to higher leverage, A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers. We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction."Foreign investment can also have significant effects on Canadian housing markets especially in Vancouver and also Toronto as discussed on the appended video.

Canada's GDP growth downgraded by International Monetary Fund

The International Monetary Fund (IMF) now predicts a lower growth rate for Canada in 2015. Last month the Organization for Economic Cooperation and Development (OECD) also predicted lower growth rates for Canada this year.

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The IMF now projects the growth in GDP for Canada this year at only 1.5 percent. In April the IMF predicted a growth rate of 2.2 percent. The U.S. rate is now predicted to grow at a 2.5 percent rate but that is also down from 3.1 percent earlier. The EU growth rate is predicted at the same rate as Canada 1.5 percent in spite of problems with Greece. The rate is unchanged from the April prediction.

The OECD had predicted a Canadian growth rate of 2.2 percent in March but reduced this to 1.5 percent in June. The decline in oil prices, negative growth in the first quarter, and sluggish pace of new investments all contributed to the reduced growth prediction. Some are predicting that there will be a recession in Canada. While many admit there may be a technical recession, that is two consecutive quarters of negative growth, many see this as a "soft patch" with no sustained broad-based decline in economic activity. Much of the distress in the Canadian economy is focused on the energy sector. Randall Bartlett TD Bank senior economist commented: "It is likely that the Canadian economy was in recession in the first half of the year. It is commonplace to define a recession as two consecutive quarters of negative real GDP growth and output now looks to have fallen by about 1.0% in Q1 and 0.6% in Q2. The second half of the year is also likely to be weaker than previously expected, reducing annual real GDP growth to around 1.2% in 2015. This would mark the weakest pace of real GDP growth outside of a recession in over 20 years,"This view contrasts with that of Doug Porter of the BMO: "What we’re seeing right now is weakness in the energy sector… at the moment it’s not spreading much beyond that.”

The IMF claims reduced spending in the energy sector is one of the main reasons it has reduced it economic growth prediction for Canada. While the price has recovered, in the last few days prices have turned downward again. Since last summer the price of oil has seen a huge 40 percent decline. In provinces such as Alberta that are highly dependent on the energy sector, there has been considerable belt tightening and reduction in investment. The new NDP government will see declining revenues. In spite of the leftist reputation of the NDP, the new government has been attempting to develop good relations with the oil patch. Premier Rachel Notley stresses the importance for Alberta of the development of the Oil Sands.

Many economists believe that the Bank of Canada will cut interest rates further after its surprise cut in January of this year. While the IMF sees slower growth this year, it predicts an improved growth rate of 2.1 percent for 2016.

This rate will still be well below predicted global growth of 3.8 per cent for 2016. Global growth for this year is judged to be 3.3 percent. Canada is well below that, as are many developed economies.

What did the IMF say?

I read the speech as well and found nothing about inter-provincial trade barriers. This gives new meaning to the phrase "reading between the lines".

What Did the IMF Say?
Posted by Erin Weir under federalism, TILMA, financial markets.
June 22nd, 2007
Comments: 1

Under the headline “IMF Admonishes Canada,” the Financial Post reported on Wednesday:
The IMF added its voice yesterday to the growing chorus of observers urging Canada to undertake a 21st-century overhaul of its financial system, saying it should create a single securities regulator, open its banking system to foreign competition and mergers and tear down interprovincial trade barriers.
. . .
Rodrigo de Rato’s three suggestions to improve Canada’s financial systems: 1.Create a single securities regulator 2.Open the banking system to more foreign competition 3. Tear down interprovincial trade barriers
I cannot find any mention of “interprovincial trade barriers” in the published text of Rodrigo de Rato’s speech, nor does the National Post outline what he said on this topic. I can think of two possible explanations:
1. Mr. Rato said something that was not in his written text, in which case it would be interesting to know what it was.
2. The Harper government and others have been so successful in conflating the sensible notion of a national securities regulator with the hazy rhetoric about “interprovincial trade barriers” that a speech on the former prompts reporters to reflexively mention the latter.
UPDATE (June 25): The Financial Post has run another story (FP2 in today’s paper) containing the following statement:
Visiting Canada last week, Rodrigo de Rato said Canada should create a single securities regulator, open its banking system to foreign competition and mergers and dissolve interprovincial trade barriers.
All of the story’s quotes relate to the first two topics. Again, there are no specifics on “interprovincial trade barriers” or what Mr. Rato said about them.