“Adverse macroeconomic shocks, such as a faltering global environment and declining commodity prices, could result in significant job losses, tighter lending standards, and declines in house prices, triggering a protracted period of weak private consumption as households reduce their debt” This is IMF’s assessment of the country’s economy.
House prices in some regions are “above levels consistent with economic fundamentals,” IMF economists said, citing an average of 10-per-cent overvaluation. A15-per-cent decline in house prices accompanied by a severe downturn in construction activity “could result in a GDP decline of some 2.5 per cent over a period of two years relative to the baseline,” IMF staff economists said in their latest report.
Potential measures the IMF suggested include larger down-payments requirements for new mortgages and a lower ratio of debt service to income.
The IMF also recommended a review of Canada Mortgage and Housing Corporation, the largest provider of mortgage insurance in Canada, even though stress tests showed that it can weather a severe economic downturn.
The IMF expects growth in Canada to slow to 1.9 per cent next year from 2.2 per cent this year, before accelerating to 2.5 per cent in 2013.
IMF’s other significant observations:
- The Canadian dollar is on the strong side of fundamentals.
- It is appropriate for the central bank to keep interest rates exceptionally low for some time.
- Should the recovery be accompanied by further sustained increases in mortgage debt as a share of disposable income spurred by low interest rates, a tightening of macro-prudential policies by the government may be needed.
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