Canadian Economy to Stall; Housing Bubble Looms

Following overall economic growth of just 1.9 percent in 2012, the IMF is tipping expansion of just 2.0 percent this year.

In its report, the Fund says Canada has weathered the financial crisis relatively well, with demand having recovered from the GFC faster than the case for the United States and the economy benefiting from strong commodity demand and favourable financing conditions which have boosted housing construction.

But it warns the strong housing market has fuelled a build-up in household debt and exposure to property price falls.

That, the Fund says, along with the fact that Canada will not be immune from economic troubles of its neighbour resulting from any fiscal debacle, means that Canada’s economy faces a number of downside risks.

“Given its strong economic and financial ties with the U.S. economy, Canada is equally exposed to risks facing its trading partner” the IMF says in its report.

“In addition, an important domestic vulnerability in Canada relates to the housing market. A sharp or sustained decline in house prices could seriously set back the leveraged household sector and domestic demand.”

Already, a number of commentators are expecting a slowdown in residential construction this year following last year’s tightening of financing rules relating to condominiums. Indeed, the Canada Mortgage Housing Corporation (CMHC) says it expects the number of housing starts throughout the country to drop from an estimated 213,700 in 2012 to 193,600 this year.

On the bright side, the IMF says that whilst a moderate rebound in the price of some metals is anticipated following sharp falls in recent quarters, futures curves for Brent crude oil imply a gradual decline in prices to less than $US100 per barrel over the medium term. This means that from a commodity price point of view, overall conditions are likely to remain conducive to keeping any rises in building input costs at moderate levels.

Also on a more positive note, the Fund expects world economic output to grow by 3.6 percent this year – up from an estimated 3.3 percent in 2011.

By Andrew Heaton