Canada: Staff Concluding Statement of the 2019 Article IV Mission
May 21, 2019
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Over the past five years, Canada has employed a judicious mix of
policies to support inclusive growth and reduce vulnerabilities in the
The use of fiscal space combined with accommodative monetary policy at the
onset of the 2014 oil price shock was effective in overcoming the recession
in 2015. The economy posted the strongest growth rate among G7 economies in
2017 and the unemployment rate fell to its lowest level in forty years. The
positive momentum in the economy carried through to 2018 and the government
took the opportunity to push through several important reforms to boost
productivity growth. A deal to overhaul NAFTA was signed, the Canada
Infrastructure Bank opened for business, and tax allowances for business
investment were expanded to help preserve Canada’s tax competitiveness
following the 2018 U.S. Tax Cuts and Jobs Act. With the policy rate kept
low amid a booming housing market, macroprudential policy was tightened to
slow the rise in household debt and to enhance the resilience of the
Risks are evolving as federal elections approach. Growth has slowed to a more sustainable level following
the stellar pace set in 2017. The global economy is slowing, low oil
prices, aggravated by domestic pipeline constraints, have dampened exports
and business investment, while private consumption and residential
investment—important contributors of Canada’s recent rapid growth—have
decelerated in line with the slowdown in the housing market, rising
interest rates, and slower real income growth. While the deal to overhaul
NAFTA was signed, the new USMCA awaits legislative approval and trade
tensions between the U.S. and its major trading partners continue to cast a
shadow over the economic outlook.
Canada should continue to preserve financial stability and focus
policies on supporting long-term growth.
Several rounds of macroprudential measures, provincial and municipal tax
measures, and tighter monetary policy have contributed to a reduction in
housing-related financial stability risks. The government is under pressure
to ease macroprudential policy or introduce new initiatives that buttress
housing activity. This would be ill-advised, as household debt remains high
and a gradual slowdown in the housing market is desirable to reduce
vulnerabilities. Looking ahead, policy priorities should focus on ensuring
that the financial system remains sound and resilient, cooperation between
federal and provincial governments is enhanced, and structural reforms
target productivity growth. This year’s Staff Report incorporates findings
from the 2019 Financial Sector Assessment Program (FSAP), which is
conducted every five years for G-20 countries. The FSAP is a comprehensive
and in-depth analysis of a country’s financial sector stability and
Outlook and Risks
Growth is projected to slow in the near term.
Real GDP growth is projected to decline to 1.5 percent in 2019, partly reflecting a disappointing first quarter and more subdued
global growth. Growth is expected to pick up in 2020 as the effects of
last year’s slowdown in oil-related activity wane
Demand for exports will continue to be supported by a robust U.S. economy
with the Federal Reserve expected to deliver more accommodation than
previously assumed, and the ratification of USMCA, which will reduce trade
uncertainty. Business investment is expected to be supported by new tax
changes that allow for immediate and accelerated expensing, although
pipeline constraints will limit investment in the energy sector.
With the output gap becoming more negative in 2019, monetary policy is
expected to remain on hold in the near term, and the fiscal stance is
expected to be broadly neutral.
Over the medium term, low productivity growth and population aging will
limit potential growth to around 1.7 percent.
Risks are tilted to the downside. A key domestic risk is a sharp
correction in the housing market. If a house price correction is
accompanied by a rise in unemployment and a collapse in private
consumption, additional risks to financial stability and growth
could emerge. External risks include a larger-than-expected global
growth slowdown, a sharp tightening of global financial conditions,
or an escalation of trade tensions between the U.S. and its major
trading partners, which could include the failure to ratify USMCA
and the break-up of NAFTA. This would impact global value chains,
weaken Canadian exports, and lower business confidence and
investment. Stronger-than-expected U.S. growth and an increase in
oil prices would provide upside risks.
The core financial system is resilient to a materialization of these
downside risks, but households and mortgage insurers would be
vulnerable, as evidenced by FSAP stress tests. The adverse scenario in the FSAP stress tests assumes a severe recession
would occur concurrently with significant financial market stress, a large
exchange rate depreciation, and a sharp housing market correction. Domestic
systemically important banks would remain resilient, helped by strong
revenue-generating capacity and existing capital buffers. Corporates would
also be able to withstand sizable income and funding cost shocks. However,
household mortgage defaults would rise significantly, with larger effects
where household debt is high. In this severe scenario, CMHC and private
insurers would need a capital injection totaling $15-23 billion (around 1
percent of GDP) to meet the supervisory target ratio.
Key Policy Messages
With growth moderating to a more sustainable level, fiscal
consolidation should be gradual. Rebuilding fiscal buffers and reducing debt faster would provide more
options to handle future challenges. In this context, the planned fiscal
adjustment is appropriate at the federal level, but provinces need to
increase the size of their adjustment to achieve overall balance for the
general government by 2024. Any unexpected fiscal savings should target
deficit and debt reduction. If downside risks materialize and growth
underperforms, automatic stabilizers should be allowed to operate fully.
Discretionary measures could be used, depending on the severity of the
To enhance its commitment to well-managed public finances, the federal
government could explicitly incorporate a fiscal rule.
The rule would be most effective if it includes a debt anchor and an
operational rule that strikes the right balance between enforcement,
flexibility, and simplicity. Regularly scheduled reviews assessing whether
the fiscal framework achieves its objectives should be an integral part of
the system. The PBO is well placed to monitor compliance and ensure that
rules are not circumvented.
At the provincial level, fiscal rules should strengthen the link with
debt while protecting public investment. Rules can be quite different across provinces. Sources of fiscal
imbalance should be identified (e.g. excessive current spending or
under-taxation) and longer-term challenges related to demographic changes
should be considered. Transparency and accountability are crucial elements
to ensure fiscal sustainability over the long term.
The authorities should continue to monitor and evaluate the
effectiveness and efficiency of the tax system.
Recent tax changes that allow for immediate and accelerated expensing are a
step in the right direction. Further steps toward a cash-flow based system
could include permanently allowing immediate expensing of all capital
investments and removing interest deductibility.
Monetary policy should remain on hold in the near term.
Further monetary tightening will be warranted as the output gap closes, but
this should be implemented at a gradual pace. Gradualism is appropriate
given the balance of risks around the outlook and uncertainty about the
level of the output gap and the neutral rate. If downside risks materialize
and the outlook deteriorates, the Bank of Canada should be prepared to cut
the policy rate.
Macroprudential policy has been effective in containing financial
stability risks and the current stance is appropriate.
With the measures working well, their effectiveness should not be diluted
by home buyer initiatives that inadvertently increase household debt. In
the event of a sharper than expected contraction in credit growth,
adjustments to macroprudential tools could be considered. Provincial and
municipal tax measures should also be harmonized into broad-based tax
measures targeted at speculative activity more generally. To alleviate
vulnerabilities in the housing market on a more durable basis,
macroprudential policy should be complemented with a broad set of
supply-side policies. As noted in last year’s Staff Report, municipal,
provincial and federal authorities need to work together to develop and
implement a comprehensive housing supply strategy to increase density and
alleviate construction bottlenecks.
The recent establishment of an Expert Panel on the Future of Housing
Supply and Affordability
is a step in the right direction.
The framework for systemic risk surveillance and crisis management has
worked well, but there is a case for modernizing the arrangement.
The responsibilities for systemic risk oversight are dispersed over
multiple agencies. This has prevented the development of a Canada-wide
framework for systemic risk surveillance and oversight. A revamped Heads of
Agencies Committee that includes all relevant agencies could be one way of
carrying out economy-wide systemic risk analysis, with the objective of
increasing transparency and cooperation around policy decisions and
providing a broader, more inclusive dialogue on macroprudential policy.
The envisaged Capital Markets Stability Act can further strengthen
systemic risk surveillance and management in capital markets. The
Senior Advisory Committee should assume the role of overseeing
Canada-wide crisis preparedness, in collaboration with key provincial
Macroprudential oversight should be complemented with stronger
microprudential supervision and safety nets.
Gaps should be addressed in bank resolution (e.g.
compensation to support bail-in), liquidity support (e.g. testing
contingency plans), and monitoring of risk-taking by pension funds (e.g.
disclosure requirements). OSFI should have the authority to issue its own
legally enforceable regulations. Memorandums of understanding still do not
exist between OSFI and provincial authorities, constraining the exchange of
information and policy coordination. There is scope for further
harmonization of the provincial regulatory frameworks, and the Cooperative
Capital Markets Regulatory System initiative can help overcome risks from
dispersed oversight of securities markets. Additional capital buffers for
mortgage exposures, along with measures to increase risk-based
differentiation in mortgage pricing, are desirable.
Current levels of productivity growth are insufficient to sustain
Canada faces the challenge of attracting productivity-enhancing investment
that both diversifies the economy beyond traditional sectors and takes full
advantage of opportunities provided by new trade agreements. Beyond
international trade and other structural reforms, there are significant
opportunities for productivity gains from reducing domestic barriers to
inter-provincial trade. Barriers to domestic trade is a longstanding issue
and nothing short of a sustained and concerted collective effort is needed
to break down barriers that are impeding Canadian businesses from competing
on a level playing field and scaling-up. A “coalition of the willing” could
be one way to accelerate progress.
- The Canadian Free Trade Agreement signed in 2017 provides a platform for
cooperation in reducing internal trade barriers, but several problematic
aspects need to be resolved, including setting clear targets for reducing
the number of exemptions and strengthening the process of regulatory
reconciliation. The potential gains are sizable and could increase real GDP
by almost 4 percent—a much larger gain than expected from recently-signed
international trade agreements. Finance, business services, and insurance
is by far the most important sector to benefit, reinforcing the value of
efforts to unify securities regulations across provinces and enhance labor
- Structural reforms should remain a key objective of the government’s
growth agenda. There is still a need to remove restrictive regulations of
product markets and foreign-direct investment. Efforts to encourage
infrastructure investment are welcome, including progress in fully
operationalizing the Canada Infrastructure Bank. However, challenges in
project selection, execution and coordination—especially at the provincial
and municipal levels—must be overcome to avoid delays in infrastructure
investment. A more detailed strategic plan is needed to prioritize
infrastructure projects that most serve the long-term national interest.
Federal and provincial authorities should continue to improve financial
reporting and cost-tracking to better facilitate the flow of federal
- The reduction in trade uncertainty that came with the new USMCA is
welcome, and the benefits of the agreement are enhanced with the
elimination of U.S. tariffs on steel and aluminum imports and Canada’s
retaliatory measures. Canada should also be commended for its rapid
ratification of CPTPP and greater opportunities for diversification that it
brings, and for its leadership in efforts to reaffirm the importance of a
multilateral trading system.
Canada volunteered to be assessed under the IMF’s Enhanced Governance
Framework on the supply and facilitation of corruption. In this regard, the authorities are encouraged to continue enforcement
actions against foreign bribery, and enhancing the effectiveness of AML/CFT
frameworks to tackle the proceeds of crime, including foreign corruption.
The IMF team would like to thank Canada for its warm hospitality
and constructive dialogue.
IMF Communications Department
PRESS OFFICER: Randa Elnagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org