IMF sees hopeful signs despite lowering global, Canadian growth predictions

OTTAWA – The Canadian and global economies will continue struggling to maintain momentum this year, but in a relatively hopeful new outlook, the International Monetary Fund says it sees light at the end of the tunnel.

The IMF now expects Canada’s economy will expand by a modest 1.8 per cent this year — two-tenths of a point weaker than it forecast three months ago — and by 2.3 per cent in 2014, off one-tenth of a point.

For the global economy as a whole, the international financial organization says growth will hit 3.5 per cent in 2013, slightly lower than its October forecast but still stronger than last year’s 3.2 per cent advance. In 2014, the world economy will rebound to 4.1 per cent, the strongest rate in three years, it says.

However, the IMF adds the global economy is coming out of the doldrums and that recent actions taken by governments and central banks around the world could pay quick dividends and produce stronger numbers starting this year.

“Policy actions have lowered acute risks in the euro area and the United States,” the Washington-based fund says in a release issued Wednesday morning.

“If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected.”

The IMF cautions that many of the troubles that have plagued the world since the 2008-09 recession remain. The eurozone recession will carry into 2013, the report predicts, although it won’t be as deep as last year’s.

Meanwhile, the U.S. could still stumble if policy-makers too aggressively tackle the country’s long-term budget hole. As it is, the IMF believes government spending cuts in America will sap 1.25 percentage points from output growth in 2013.

“The priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling and agree on a credible medium-term fiscal consolidation plan focused on entitlement and tax reform,” the IMF advises.

Still, the overall take from the new analysis is more upbeat than recent releases from the group.

It notes that while Japan has slid into recession, the slump is expected to be short-lived and growth will resume this year. It adds that government action is helping boost activity in some emerging markets, particularly China, where growth is anticipated to top eight per cent in both 2013 and 2014 after a sub-par year in 2012.

While the IMF did not issue a specific analysis for Canada, the 1.8 and 2.3 per cent growth rates for 2013 and 2014 are in line with the consensus of private sector economists.

Many analysts believe Canada has one more year of below-trend growth ahead of it and that the U.S., a laggard since the recession, is poised to turn the tables on its northern neighbour in terms of economic performance.

“It’s reasonable to argue that the U.S. is more likely to have some pent-up demand in housing and the consumer sector to unleash, whereas Canada is at structural peaks across all these things,” explained Derek Holt, vice-president of economics for Scotia Capital.

With the housing sector slowing and Canadian consumers holding record debt levels, economists reason exports and business investment will need to carry the ball going forward. But that is unlikely to happen in a meaningful way until expansion in the U.S. and the global economies becomes a reality.