The International Monetary Fund just completed Canada’s annual economic health check.
The IMF is perhaps best known for its crisis lending to debt-challenged governments in places like Greece, Portugal or Ukraine. However, it also does annual policy reviews for the rest of its 188 member countries.
The IMF is the international economic equivalent of your annoying doctor, who keeps suggesting you eat less bacon and exercise more when you haven’t even had a heart attack yet. And as many of us ignore our doctor’s advice, many governments find it easy to ignore the IMF. If a country doesn’t need a multi-billion dollar IMF loan, then the organization has limited leverage.
Many national politicians find the IMF annoying for its buzzkill views on many of their favourite expensive election promises. Citizens, who usually end up holding the long-term bag for dodgy economic policies, may want to pay more attention.
The IMF’s 2013 report card on Canada is reassuring, at least compared to most other countries. Economic growth in the year up to the first quarter of 2013 was 1.4 per cent. Although this was down from 2.6 percent the year before, growth like 1.4 per cent is better than most European countries can even dream about these days. IMF economists also expect Canadian growth to accelerate into 2014.
The IMF expects the big growth drivers to be a recovering U.S. economy and continued massive investment in the Canadian energy sector. These factors will outweigh headwinds such as indebted governments and consumers cutting back their spending.
So far, so good.
However, the IMF also likes to talk about “downside risks.” The U.S. economy could be derailed by more Washington bickering over the federal debt ceiling, or excessively rapid “tapering” of quantitative easing by the federal reserve. A sudden slow-down in emerging markets or further ructions in the Eurozone could also create problems for Canada.
The energy sector could end up growing faster than expected, especially if new pipeline construction and U.S. demand grow faster than assumed. However, delays in energy infrastructure projects or faster growth in U.S. oil and gas production – driven by more fracking in unconventional properties – could slow the Canadian economy.
The IMF, like your bacon-hating doctor, also has some advice for Canadians.
With growth solid and inflation remaining low, the IMF tells us that there is no hurry for the Bank of Canada to raise interest rates. This is good news for people with floating-rate mortgages and consumer debt, and bad news for savers.
The IMF also says that the federal and provincial governments need to continue to manage their deficits carefully. We are “not immune to long-term spending pressures, mainly coming from population aging and continued growth in per capita health care costs.”
As for the federal deficit, the IMF considers the current debt repayment approach “appropriate.” There is room if the economy slows down, however, to delay balancing the budget.
The IMF suggests the provinces (and territories also, I assume) set up independent budget offices so that citizens have an independent view to compare with the rose-tinted forecasts that finance ministers often make. Their economists also suggest a more formal fiscal policy, spelling out in advance how the deficit will be allowed to move up and down in good years and bad. The IMF points out the new federal and Alberta policies in this area as steps in the right direction.
IMF boffins also suggest Canada take steps to manage the risks in its housing sector better. Reuters reported that Canadian household debt as a percentage of income hit a record high in the second quarter. It was even higher than the figure in the U.S. just before their bubble burst.
With house prices continuing to surge in many parts of the country, and Canadians taking on ever more debt to pay them, we risk “triggering a less friendly unwinding of domestic imbalances and further weakening of household spending.”
That is IMF-talk for a housing bubble bursting.
The IMF also suggests we rethink how mortgage insurance happens in Canada. The taxpayer, through the CMHC, has guaranteed almost $600 billion of mortgages in Canada. To put that in perspective, it is more than double the total annual federal program budget.
If Canada had an American or Irish style housing accident, the federal government would be crippled if it had to make good on a substantial portion of the $600 billion in insurance. That may be a remote eventuality, but you might have noticed that “once in a lifetime” events seem to be happening to banks and insurance companies more often lately.
The IMF is quite right to say that we should be rethinking our approach to insurance while the housing market is relatively good. The government has already started to take some steps. If anything happens in the next few years, we shall see if they started soon enough.
So what are the implications for Yukoners?
First of all, it is reassuring that the IMF thinks the federal finances are in tolerable shape. This bodes well for our continued transfer payments.
Secondly, it looks like we will continue to enjoy low interest rates and our exporters will have a relatively strong Western Canadian economy to export into.
That may not sound too exciting, but we should be thankful we’re not reading an IMF report like the ones being published in Athens or Kiev this year.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Twitter @hallidaykeith