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IMF not so optimistic about Canada

While we seem bombarded about messages boasting of the Harper government’s economic accomplishments and predictions of even greater progress in the years ahead, our economic situation is nowhere as rosy as Finance Minister Jim Flaherty would have us believe.

This is spelled out quite clearly in the latest report on Canada by the International Monetary Fund.

While the IMF recognizes that Canada has emerged from what it calls the Great Recession, it finds that the economy’s growth has been “modest” and that the political decision to balance the budget by 2015 (in time for the next election) has meant weaker economic growth and more unemployment in the meantime.

Federal spending restraint to reach its balanced budget target has been a drag on the economy, though as the IMF says, “the federal government has room to delay the planned return to a balanced budget in 2015 absent a meaningful pickup in growth.”

The federal government could, for example, have pursued a much stronger investment program for needed public infrastructure over the past couple of years without jeopardizing the country’s fiscal health.

This would have meant more job creation and a stronger economy.

As the IMF cautions, “fiscal adjustment plans should strike the right balance between supporting growth and rebuilding the fiscal space.”

It’s fair to say that Flaherty has sacrificed some growth and job creation to pursue his 2015 balanced budget goal, which is more about politics than economics.

Canada’s economic recovery has been driven largely by the low interest rates and easy monetary policy of the Bank of Canada, encouraging Canadians to go into deb, rather than in productive investment to raise our growth potential.

But as the IMF points out, this has “left a legacy of elevated household debt and high house valuations.” The ratio of household debt to income reached a record high of 152 per cent, as of the third quarter 2013. Low mortgage rates have helped drive up housing prices and the IMF estimates Canadian housing is overvalued by 10 per cent.

What’s needed, the IMF says, is “more balanced economic growth, with stronger contributions from exports and business investment” but, as it notes, “this has proved elusive.”

For example, “Canada’s exports have barely recovered from the Great Recession and are well below the levels reached after earlier recessions.” The weakness of the U.S. economy is only a partial explanation, it says. Canada has serious productivity and competitiveness problems.

The weakness in our exports “also reflects the declining trend for non-energy exports that began about a decade ago, as low productivity growth, increased competition from emerging markets and the appreciation of the currency eroded Canada’s external competitiveness, particularly in the manufacturing sector,” according to the IMF’s analysis.

In the IMF’s view, our dollar is still overvalued.

Business has not been investing to improve competitiveness, despite record levels of cash. In fact, business investment in non-residential structures and in machinery and equipment provided no contribution to growth in the economy in the first nine months of 2013.

Hence the IMF’s warning that “the composition of growth does not yet point to the much-needed rebalancing from household consumption and residential construction towards exports and business investment.”

The IMF notes another key change in Canada — our growing dependence on energy production, largely from the oilsands, for exports and investment. But Canada’s growing dependence on a single industry — the oilsands — also makes Canada vulnerable to shifts in demand and prices.

In fact, it is forecasting a 20 per cent decline in world oil prices by 2019. Even with expanded oilsands output, it won’t be enough to offset manufacturing weakness. With the unbalanced growth of recent years, especially the weakness in exports, Canada is becoming more dependent on foreign capital to pay its way in the world.

This is reflected in Canada’s shift from a current account surplus in the 2000s to a shift to deficits in 2009 and deficits continuing through the forecast period to 2019. These deficits are being financed by foreign purchases of Canadian debt securities, leading to a growing foreign debt.

This is why rebalancing our economy, which clearly includes revitalizing our manufacturing sector, has to be a priority in Canada’s economic policies if we are to have an economy with a stronger base for future productive growth and prosperity, and which can support the challenges of an aging population, without burdening the young.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at



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