The International Monetary Fund downgraded its global economic outlook Tuesday, and warned that Canada’s economy remains vulnerable to high household debt levels and risks from the housing sector.
In its latest World Economic Outlook report, the IMF downgraded its growth forecast for the world economy to 3.3 per cent this year from its July estimate of 3.5 per cent. The agency predicted the global economy will grow by 3.6 per cent in 2013, which is down from 3.9 per cent in July and 4.1 per cent in April.
The IMF made note of sluggish growth and fears of recession in some advanced economies, which is also affecting emerging economies as global trade slows.
“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” IMF Chief Economist Olivier Blanchard said in a statement.
Dawn Desjardins, assistant chief economist for RBC, told Power Play that the downgraded growth forecast was wholly anticipated, but warned that further downgrades could be ahead.
In Canada, growth is projected to be 1.9 per cent this year and 2 per cent next year, both figures down 0.2 per cent from three months ago.
Desjardins said the two per cent growth is approximately the economy’s potential, calling it “solid.” But she acknowledged potential risks from south of the border or from the elevated level of household debt.
“I think they’re looking at productive capacity growth rates but with some eye to the risks that are definitely present,” said Desjardins.
The report noted that Canada’s economic recovery has been “more robust” than in the United States, which is reflective of “favourable financing conditions,” as well as the commodity boom.
But it also warned that “In Canada, a priority is to limit risks related to elevated house prices and household debt levels.”
The report said Canada’s growth has been constrained by sluggish growth south of the border, a result of the two countries’ close economic ties.
“Still, activity has recovered at a faster pace than in the United States. Domestic demand -- both business investment and private consumption -- has been supported by exceptionally favourable financing conditions, including low interest rates and credit availability,” the report said.
“These factors, along with the commodity boom, have also boosted the housing sector, especially in provinces with strong mining activity. However, housing-related credit and household leverage have risen markedly since the Great Recession, despite measures to limit mortgage growth.”
The IMF credited tighter regulations for slower mortgage growth. The federal government has moved to limit mortgage terms and tighten mortgage insurance rules.
However, the agency warned that, “if household leverage continues to rise, additional measures may need to be considered.”
The report raised its U.S. growth projection for this year to 2.2 per cent, from 2 per cent in July. However, it downgraded its growth projections for next year to 2.1 per cent, down from 2.3 per cent.
The IMF also predicted low growth in the eurozone’s “core economies,” such as Germany and France, but predicted “a sharp contraction in 2012” among the so-called “periphery” euro economies, with a slow recovery beginning next year.
The agency said its forecast rested on two major policy assumptions: that European lawmakers will “get the euro area crisis under control,” and that U.S. lawmakers will be able to stop tax increases and spending cuts that are set to take effect in 2013.
The report noted that “it is very difficult to estimate the probability that this action will materialize.”
Desjardins said the IMF has made its outlook contingent on the fact that “they do expect euro-area governments and U.S. governments to put in place or meet the challenges in the near term.” She warned that if this does not happen, expect more disappointing news on the horizon.
Desjardin also acknowledged they didn’t anticipate that certain countries, namely China, would slip below the eight per cent growth mark. Their economy has slowed for some time, she said, citing a weakening real estate market and weakening demand for their exports.
At the opening of the IMF’s meeting in Tokyo on Tuesday, Blanchard told reporters bright spots on the economic horizon include signs of a recovery in the U.S. housing market, as well as a slowdown in China that will put it on course for a more “sustainable” rate of growth.
