Canada: 2013 Article IV Consultation

KEY ISSUESEconomic Outlook: Strong private consumption and residential investment helped Canada recover quickly from the last recession but left a legacy of elevated household debt and high house valuations. The transition to more balanced economic growth, with stronger contribution from exports and business investment, has proved elusive, and economic activity remained modest in 2013. Staff expects growth to accelerate above potential in 2014, following a stronger recovery in the United States, but the balance of risks remains on the downside.Policy Mix: Low inflation, downside risks around the pickup in activity over the near future, and the moderation in the housing sector since mid-2012 suggest the Bank of Canada has more time to wait before starting to normalize interest rates than we anticipated in the 2012 Article IV Consultation Staff Report. With strong post-crisis fiscal consolidation and low levels of net debt, the federal government has room to delay the planned return to a balanced budget in 2015 absent a meaningful pickup in growth. There is limited room for maneuver for those provinces that have made less progress in reducing the fiscal deficits and face long-term fiscal sustainability challenges.Housing sector, macro-prudential policies, and mortgage insurance: Household leverage remains high, and while house price and construction growth have come off their post-crisis peaks, high valuations and excess supply in a number of housing markets are a source of vulnerability. If maintained, the ongoing moderation in the housing market suggests little need for additional macro-prudential measures but it is important to remain vigilant. Over the longer term, rethinking the role of government-backed mortgage insurance may reduce the government exposure to housing sector risks and lead to a more efficient allocation of resources.Financial sector policies: While Canada's financial supervisory and regulatory framework is strong, there is room to strengthen it further along the lines indicated by the 2013 FSAP Update mission.Policy response to past advice: Since the 2012 Article IV Consultation mission, authorities have continued to take measures to ensure a sustainable development of the housing market, which the mission emphasized as a source of vulnerability last year. Recent progress in moving towards a less fragmented regulation of securities markets is also in line with past staff advice. At the provincial level, efforts to contain health care spending, the establishment of an independent fiscal council in Ontario, and the introduction of a new fiscal framework in Alberta are all consistent with recommendations contained in previous staff reports.