Canada’s Growth Less Than Expected: IMF

The much-needed private sector recovery is beginning in most of the developed world but growth will remain weak, even in Canada, the International Monetary Fund says in a new outlook.

The IMF’s new forecast sees Canada’s economy expanding slower than it previously thought — 2.3 per cent this year instead of the 2.7 per cent it had projected just a few months ago.

But the revision should not come as a surprise since it is almost exactly in line with the Bank of Canada’s updated forecast of last week, which estimated growth for 2011 at 2.4 per cent.

According to the IMF, Canada will have the second-strongest growth rate in the G7 group of advanced economies, just a breath ahead of Germany’s 2.2 per cent increase and below the three per cent rate projected for the United States.

In 2012, Canada’s economy will expand by 2.7 per cent, the IMF said.

Overall, the global economy will grow 4.4 per cent this year and 4.5 per cent in 2012, the IMF estimates.

The big change in the new report is that the Washington-based institution of global financial governance sees the recovery in advanced countries becoming entrenched, with the help of some government stimulus in the U.S. and Japan and emerging signs that a rebound in the private sector is kicking in.

“Signs are increasing that private consumption — which fell sharply during the crisis — is starting to gain a foothold in major advanced economies,” the IMF said.

“During the second half of 2010, global financial conditions broadly improved amid lingering vulnerabilities. Equity markets rose, risk spreads continued to tighten and bank lending conditions in major advanced economies became less tight, even for small- and medium-sized firms.”

There are still plenty of things to worry about, the IMF is quick to add. The European sovereign debt crisis continues to percolate and the U.S., while not facing a debt crunch, is heading toward unsustainable levels with an annual deficit to gross domestic product of almost 11 per cent. By contrast, Canada’s deficit is about three per cent.

Even in the developing world, where growth remains strong, there is an emerging challenge of inflation and persistent rising food prices.

“The recent bout of high food price inflation has been quite persistent, straining the budgets of low-income households,” it said.

Lastly, the IMF warns that the two-track recovery — with growth robust in the emerging world and moderate to tepid in advanced economies — continues to plague the global recovery.

And the IMF says advanced countries can’t keep papering over root problems through government stimulus.

“It is clear that monetary and fiscal policy support can be helpful in the short term, but that such support is no substitute for structural solutions to long-standing problems,” it says.

Specifically, it says governments taking on huge debts must get their fiscal house in order.

And the banking problems in Europe must be addressed to boost confidence, it added.

Emerging economies, meanwhile, can’t continue to pursue policies like currency manipulation that promote global imbalances and give rise to inflation at home.

“Countries with undervalued exchange rates should allow this price mechanism to operate to help offset inflow pressure,” it said.

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