IMF approves Liberals’ handling of economy, warns of longer term challenges

But possibility of NAFTA renegotiation, oil price decline could present difficult challenges ahead


The International Monetary Fund has given the Trudeau government a passing mark for its handling of the economy since coming to power, but warns that “more difficult challenges lie ahead.”

The comments are contained in an annual report released by the Washington-based organization Thursday that credited the Liberals with helping the Canadian economy regain momentum.

“To support the economy, the government introduced tax cuts for the middle class, expanded family benefits, and raised infrastructure spending,” the report said.

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The billions of dollars in additional spending combined with the Bank of Canada’s historically low interest rates, “has succeeded in revitalizing the economy after a tough year in 2015,” the report said.

At a news conference on Parliament Hill to announce former astronaut Julie Payette as the next Governor General, Prime Minister Justin Trudeau touted his government’s approach to the economy.

“We’re going to continue to deliver on the commitments and the promises we made in the last election and in the throne speech we presented 18 months ago,” he said.

“Now is not the time to change from the strong approach that’s delivering for Canadians. Now is the time to continue on the hard work we’re doing to help Canadian families.”

NAFTA questions

Yet the IMF also raised alarm bells about the amount of uncertainty in Washington, and its potential impact on Canada’s economy over the long term.

Among the issues was whether the Trump administration would significantly cut corporate taxes, which would make Canada less attractive to investors, and the future of NAFTA.

The IMF also cited major concerns about Canada’s housing market, warning that any sudden decline in prices could send shockwaves across the country.

“The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy and increases contingent claims on the government,” the report said.

There were also worries about the impact of further oil price declines.

One of the IMF’s prescriptions for maintaining the economy’s momentum was to keep interest rates low. After the report was written, but before it was released, the Bank of Canada raised its key interest rate for the first time in seven years on Wednesday, from 0.5 per cent to 0.75 per cent.

Cheng Hoon Lim, the IMF’s mission chief for Canada, said the rate increase reflected the fact the economy has been doing well over the past few months, though he advised the Bank of Canada to take things slow.

“We welcome the good news on the economy and note that even with the rate hike, monetary policy remains appropriately accommodative,” Lim said.

“Given the considerable uncertainty around the growth and inflation outlook, the Bank should continue to take a cautious approach in further adjusting the monetary policy stance.”

The report also advised the federal government to continue with its plan to invest billions more on infrastructure over the next decade, though it said the deficit should start to come down next year.

The Liberals said in their last federal budget they expect to rack up $142 billion in new debt between 2016-17 and 2021-22.

Despite signs the economy was starting to turn around, the IMF found that two important engines of growth had not met expectations: private sector investment and non-energy exports.

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