World Economy

IMF Warns Canada of Recovery Risks

IMF Warns Canada of Recovery RisksIMF Warns Canada of Recovery Risks

Canada is undergoing a modest economic recovery but faces increased risks from a long period of lower commodity prices and a possible housing downturn in two of the country’s biggest cities, the International Monetary Fund said Monday.

For now, Canada is adjusting to the recent drop in the price of crude oil, a top Canadian export, the IMF said in its latest update on the country’s economy. However, the agency said uncertainty about future oil prices and further turbulence in China are the biggest external headwinds for the Canadian economy. It warned the fallout from lower commodity prices continues to play out, WSJ reported.

The IMF, which forecasts 1.7% expansion this year in Canada and 2.2% growth in 2017, said low interest rates, combined with a pivot toward aggressive fiscal policy and a softer Canadian dollar, will provide a buffer as capital and labor shift from the commodity sector to the non-resource side of the economy.

Elevated levels of household debt and the danger posed by frothy real-estate markets in Toronto and Vancouver, British Columbia—the country’s largest and third-largest urban regions, respectively—require a close watch by officials, the agency said. It estimated Canadian housing prices remain 10% to 30% overvalued.

“The near-term policy challenge is to pursue an appropriate policy mix that is supportive of growth while containing vulnerabilities in the housing market,” the IMF said. The warning comes after Bank of Canada Governor Stephen Poloz last week cautioned that gains in the Vancouver and Toronto housing markets weren’t sustainable.

The IMF said lower interest rates are necessary given economic conditions but has encouraged consumers to take on record levels of debt to fund purchases such as homes. That poses a challenge to Canadian officials, who would like to restrain consumer borrowing without jeopardizing economic expansion.

Regulations governing mortgage financing “remain the first line of defense in safeguarding financial stability” and address risks in the housing market, the IMF said, while warning interest rates remain too blunt a tool.

Finance Minister Bill Morneau said last week that government officials were conducting a “deep dive” into Canadian housing with an eye toward taking measures “to ensure [the housing] market stays healthy for Canadians.”

In December, Canadian officials unveiled a series of measures to contain housing risks, including requiring first-time buyers to make larger down payments on pricier homes.