Canadian economy will still grow in 2018, just at a slightly slower pace, IMF predicts

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WASHINGTON — The International Monetary Fund projects moderate economic growth for Canada this year and next, albeit at a rate lower than last year’s and significantly slower than in the United States.

In a document generally positive about the current global economy, but flashing warning signs of potential trouble ahead, Tuesday’s IMF World Economic Outlook foresees growth in Canada of 2.1 per cent this year and two per cent next year.

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That represents a downgrade from January’s outlook of 2.3 per cent growth forecast for this year, and it’s less than the strong three per cent growth Canada experienced in 2017.

It’s also less optimistic than the forecast for the U.S.: the United States is projected to grow almost three per cent this year, which is a significant improvement from recent IMF outlooks.

“They’re very closely aligned with our forecasts,” said Brett House, the deputy chief economist at Scotiabank, where the prediction for Canada is one-tenth of a percentage point higher than what the IMF projects.

“Very, very close to our numbers.”

The broader document is generally optimistic about this year’s global prospects, with worldwide growth being on an upswing and a larger-than-previous forecast of a 3.9 per cent increase for 2018.

Yet it warns of looming worries — potential trade wars; rising interest rates; heavy spending in certain countries, including the U.S., which could leave little fiscal space for the next downturn; and insufficient worker skills to deal with technological changes.

“Favourable conditions will not last forever,” IMF economic counsellor Maurice Obstfeld wrote.
“Now is the moment to get ready for leaner times.”

He also expressed concern about the longer-term effect of American policies, after the near-term growth spurt.

The U.S. is ramping up government spending at the very peak of the economic cycle, even as it cuts taxes, and the deficit is projected to balloon. He suggested this might add to inflation risks; accelerate the need for interest-rate hikes; strain mortgages; and ultimately widen the import-export trade deficit, which is the source of trade tensions.

He also pointed to the trade tensions that already exist, with skirmishes over steel tariffs and the U.S.-China punitive threats over intellectual property theft: “The first shots in a potential trade war have now been fired,” Obstfeld warned.

But in the short term, analysts agree the U.S. is poised for a good economic year.

House attributes the rosier U.S. outlook to federal tax cuts, a massive US$300-billion spending package and the possibility of an additional spending or infrastructure bill.

He also calls the slightly slower growth in Canada unsurprising.

House describes 2017 a unique “breakout year,” with growth boosted by the new federal child-care benefit and the oil rebound from sagging prices and the Fort McMurray fires.

Trade uncertainty, rising interest rates and measures to cool the Toronto and Vancouver housing markets have also contributed to the slower Canadian growth projection, he said.

“Things continue at strong levels in 2018,” he said.

“But when you’re already at a strong level, growing at the same nearly three per cent rate that we saw last year is tough.”