Canada growth moderating, external risks remain - IMF

Mon Oct 31, 2011 1:00pm EDT

* Sees growth of 2 pct in 2011, 2012

* Soft demand in trading partners a constraint

* IMF says medium-term outlook broadly favorable

By Andrea Hopkins

TORONTO, Oct 31 (Reuters) - Canada's economic outlook is good, but growth is slowing and risks are tilted to the downside, with any external shock likely to be amplified by high consumer debt and house prices, the International Monetary Fund said on Monday.

The multinational agency said it expects growth in Canada's gross domestic product to slow to about 2.0 percent in 2011 and 2012, a slightly downgrade from its September forecast and in line with the Bank of Canada's outlook released last week.

Growth will be "constrained by weak demand in trading partners, a strong Canadian dollar and fiscal adjustment," it said in a statement.

Canada is doing well economically, especially compared to fellow G7 countries, thanks in part to its resilient financial system and credible monetary and fiscal policy, but the "very unsettled external environment" threatens the outlook, the IMF said after its regular two-week assessment of the country.

"Important downside risks remain, including external headwinds from financial market spillovers of turmoil in Europe; a weaker U.S. economy; and lower commodity prices under a scenario of weaker global activity," the IMF said in a statement.

It said the impact of a big global shock could be amplified by "elevated household debt and house prices" - the two imbalances most frequently cited by economists - but praised moves earlier this year by the government to restrain new mortgage debt and cool the housing market.

The challenge now for Canadian authorities is to return fiscal and monetary policy to a neutral level after the extraordinary measures in recent years aimed at countering the global financial crisis, the IMF said.

Still, the Fund appeared to support the Bank of Canada's decision last week to hold official interest rates steady at an ultra-low 1 percent in the medium term, citing risks of a global slowdown, which would hurt Canadian exports and consumer confidence.

"In terms of monetary policy, an accommodative stance will remain appropriate for some time given stable inflation expectations, ongoing economic slack, forthcoming fiscal drag, and heightened external risks," it said.

It also repeated advice to the Canadian government and the Bank of Canada to be ready to react quickly should the recovery falter, providing more stimulus with lower interest rates or higher deficit if needed to boost domestic demand.

While praising the government's measures to curb the build-up in mortgage debt, the IMF said more measures may be needed to forestall the risk of a steep housing correction if prices and household debt continue to climb.

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