IMF warns of "substantial further cooling" for the Canadian economy

The inflation rate is not likely to return to the BoC's 2% target in the near future

IMF warns of "substantial further cooling" for the Canadian economy

The International Monetary Fund has warned of a further economic slowdown for Canada, and called on federal and provincial governments to moderate their spending to shore themselves up against the threat of recession.

This is despite Canada coming through the pandemic “relatively well”, particularly since its status as a commodity exporter meant that, compared to other economies, it wasn’t as affected by the Russian invasion of Ukraine.

“Nonetheless, inflation is well above target, housing affordability is a major concern following a long boom that may now have peaked, and the pandemic remains a source of risk,” the IMF said in an Oct. 12 report.

“[We] expect a substantial further cooling of the economy, with risks to growth tilted to the downside, and shocks could easily push the economy into a mild recession,” the report added. “Revenue windfalls at both federal and provincial levels should be saved, and while some space could be made for limited and highly targeted programs to buffer vulnerable households from high fuel and food prices, more generalized spending increases should be avoided so as not to undercut monetary policy.”

Read more: Sherry Cooper: Latest employment numbers justify BoC’s current strategy

The IMF is projecting Canadian economic growth to settle at 3.3% in 2022, before decelerating to 1.5% next year. Inflation will average 4.2% in 2023, and will only return to the central bank’s 2% target by the end of 2024.

The Canadian unemployment rate is likely to reach 5.2% in 2022, before increasing to an average of 5.9% next year and around 6% for the next few years, the IMF said.

The economic situation could also end up being “substantially worse” if inflation does not sufficiently moderate.

“If inflation remains higher than in the baseline, this could trigger sharper BoC tightening and a more pronounced deceleration of activity,” the IMF said. “A more abrupt slowdown in the rest of the world – and particularly in the US, given the close integration of the two economies – would also have an important impact on Canada.”

“A mild recession could easily emerge, and the historical distribution of risks suggests a roughly 10% chance that the economy would contract for 2023 as a whole.”