Global economy weakening, but Canada continues with slow growth: IMF forecast

OTTAWA – The International Monetary Fund is calling for further government action amid signs the recovery is faltering in many countries, although Canada’s outlook has held up better than most other advanced economies.

The 188-country organization said Monday that it expects Canada’s economy will grow modestly, by 2.1 per cent this year and 2.2 per cent next year — virtually unchanged from the IMF’s forecast in April.

That’s not the case in many parts of the world.

The IMF’s July outlook warns that, after a better-than-expected start to the year, growth is slowing in many parts of the world, shaving two-tenths of a point off of the IMF”s 2013 estimate, which falls to 3.9 per cent.

The 2012 growth estimate has also been reduced, by one-tenth of a point to 3.5 per cent.

The expansion is mostly due to strong, if moderating, growth rates in the emerging economies and smaller advanced economies, such as Australia.

Overall growth in advanced economies is only expected to hit 1.4 per cent this year and 1.9 per cent in 2013, very weak levels, with some nations faring far worse.

Some countries in the euro area are in recession and at best can expect minuscule growth next year, the IMF says.

The United States growth projected at 2.0 per cent and 2.3 per cent in 2012 and 2013, one-tenth of a point less than before and not enough to decrease unemployment.

Even emerging market expansion is moderating because weakness in Europe and U.S. is dampening demand for their exports.

But it is not a few percentage points of gross domestic product that has the Washington-based economic watchdog most concerned — it’s the rising risk that Europe will go off the rails, and to a lesser extent, the U.S. as well.

It particularly singles out Italy and Spain, which it says must be prevented from collapsing.

“More worrisome than these revisions to the baseline forecast is the increase in downside risks,” Olivier Blanchard, the IMF’s chief economist, said in a webcast press conference.

“Italy and Spain have to succeed,” he added. “They have to do what’s needed to succeed, they have to do the adjustment in competitiveness, which is tough, they have to do fiscal consolidation, which is tough.

“But that’s not enough, they are in a very deep hole (and) they need help from other euro members.”

In addition, the IMF says the U.S. must avoid at all costs an abrupt withdrawal of fiscal stimulus.

And emerging economies should be on the watch for signs of trouble and prepared to take action.

The IMF does not mention Canada in its analysis, other than placing it in the table of economic projections. Canada places No. 2 among the Group of Seven countries in terms of growth, with Japan at No. 1 this year with 2.4 per cent and the United States in top spot at 2.3 per cent growth in 2013.

The Canadian growth rates forecast by the IMF are below the Bank of Canada’s call of 2.4 per cent both years, but in line with most private sector economists, who have been downsizing expectations the past few months.

Analysts expect the Bank of Canada will also shave its outlook at the next opportunity, which comes Tuesday morning during its policy interest rate announcement.

That would signal that the central bank, which had been hinting of raising interest rates later this year, likely intends to stay on the sidelines until 2013 at the least.

Bank governor Mark Carney has publicly expressed concerns that historically low interest rates have lured many Canadians to take on too much debt and inflated real estate prices, but Finance Minister Jim Flaherty’s recent moves to tighten mortgage rules has taken some air out of the balloon. As well, all signs point to both lower demand and prices on the housing front.

For Europe, the IMF has a series of recommendations, many of which have been voiced in the past.

It calls on Europe to implement bank bailout measures they’ve introduced and to take steps toward further banking and fiscal union.

And it also calls on the European Central Bank to become more active than it has been to support growth.

“There is room for monetary policy in the euro area to ease further,” the IMF says, including “non-standard measures” that go beyond cutting interest rates.