* IMF says BoC should resume modest tightening in late 2013
* Projects growth of 1.8 pct in 2013, 2.25 pct in 2014
* Says U.S. fiscal cliff, European crisis biggest threats
* Warns on household debt, says tighter policies may be
* Says Canadian dollar overvalued
By Claire Sibonney
TORONTO, Dec 19 Canada's economy should start
ramping up in the second half of next year following a couple
years of sluggish growth, allowing the Bank of Canada to resume
raising interest rates by the end of 2013, the International
Monetary Fund said on Wednesday.
In a report that warned about the threat to the Canadian
economy from the U.S. "fiscal cliff," a worsening euro zone debt
crisis, and high levels of household debt, the multinational
agency said real economic growth likely slowed to 2 percent this
year. It expects growth of just 1.8 percent in 2013.
But it said the economy will start accelerating part way
through next year, paving the way for growth of 2.25 percent in
2014. The IMF's World Economic Outlook in October had forecast
Canadian real GDP growth of 1.9 percent in 2012 and 2 percent in
"(If) a shock hits the economy, (households) already have a
lot of debt and cannot smooth consumption by borrowing, cannot
really borrow their way out of the crisis, and this is where
Canada is right now," Roberto Cardarelli, the IMF's mission
chief to Canada, said in a briefing to reporters.
"The challenge for policy in this context is to support
growth, to make sure that the support to growth is not going to
disappear over the next few quarters and to make sure that this
gradual unwinding of excesses in the housing sector is ...
SEES C$ AS OVERVALUED
The IMF expects stronger exports and business investment to
contribute to the pickup in growth in the second half of 2013,
helped by more certainty in the United States, Canada's largest
Exports have struggled because of the relatively strong
Canadian dollar, which the IMF saw as 5 to 15 percent overvalued
given the country's wide current account deficit.
The currency has been supported by heavy flows of foreign
investment, attracted partly by the Canada's comparatively
strong economic fundamentals. Canada's safe-haven appeal has
been further boosted by an IMF plan to have big players such as
central banks detail their holdings of Canadian dollars.
The multinational agency approved of the Bank of Canada's
current accommodative stance - its key interest rate sits at a
below-inflation 1 percent - and said the next gradual monetary
tightening should start in late 2013.
The IMF's recommendation is similar to the median view of
forecasters in a recent Reuters poll, which was that the Bank of
Canada - still the most hawkish Group of Seven central bank -
will resume raising interest rates in the fourth quarter of
Cardarelli said he expected Canada's output gap - excess
slack in the economy - to be absorbed by the end of 2015.
The IMF cautioned, however, on Canada's high level of
household debt. "If household imbalances continue to build up in
the context of modest growth, further macro-prudential measures
should be taken into account before considering an earlier start
of monetary tightening," the report said.
HOUSE PRICES RICH, NO CRASH SEEN
The agency welcomed tighter government mortgage rules
introduced this year and said that if the economy were to weaken
significantly, there was still room for further monetary easing.
If the U.S. "fiscal cliff" remains unresolved - which many
economists say could push the United States back into recession
- the IMF estimates that the impact on Canada would be around 75
percent of the effect on the U.S. economy.
On the domestic front, the IMF noted a cooling housing
sector and cautioned that economic headwinds would be
exacerbated by the high levels of household debt, which could
force households to spend less and save more.
It said, however, Canada should be able to avoid a housing
crash like the one experienced by the United States. It said the
housing market is currently about 10 percent overvalued in real
terms overall, and that prices should flatten out over the next
five years, taking inflation into account.
While praising a sound banking system that helped Canada
weather the global recession better than many of its peers, the
IMF noted that Canadian banks are not immune to troubles abroad.
It said that the low interest rate environment would make
profit growth challenging, prompting banks to rely more on
volatile capital markets and expand abroad.
The IMF called for further steps to strengthen the financial
system, and supported efforts to establish a single securities
The agency also warned that the low interest rate
environment would weigh on non-bank sectors such as pension
funds, which may require higher contributions.
The report said the government should continue to address
long-term spending pressures.
While Ottawa's plans to balance the budget by 2015 are "well
within reach," it said deficit-cutting may prove more difficult
for some of Canada's largest provinces. In the event of big
negative shocks from abroad, the IMF recommended that the
federal government consider more fiscal stimulus.