Canada looks strong despite oil shock, OECD and IMF conclude

14 Jun 16

Canada’s government continues to have a strong fiscal position despite global fall in commodity prices, but more investment is needed to support long-term economic growth, a review from the OECD has concluded.

Examining the country’s economy, the group said Canada was adjusting to the lower prices for oil, gas and minerals, which make up a large proportion of national output.

It forecast growth of 1.7% this year and 2.2% in 2017, as the economy shifts toward non-resource-based activity. This is up from 1.2% in 2015, when the rate halved compared to 2014 due to lower commodity values.

Exchange rate depreciation, Canada’s flexible labour markets and monetary and fiscal policy are supporting the shift towards non-resource production, the economic survey stated.

The government deficit is expected to stabilise at around 2.2% of gross domestic product in 2016 and 2017, up from 1.7% last year.

“The federal government has a strong fiscal position, with room to support demand in the short term, speed resource reallocation and promote longer-term-growth and inclusiveness,” it stated.

The government should therefore increase federal investment in physical infrastructure, social housing, education and innovation as planned.

Such investment could also boost productivity, which the OECD said was needed to reduce risks to financial stability.

“The Canadian economy is proving resilient, but continues to face headwinds from the low growth trap facing the global economy,” OECD secretary general Angel Gurría said.

Meanwhile, the International Monetary Fund concluded its annual Article IV consultation in the Canada. It found the persistent oil shock remains a major test of the country’s economic and financial resilience, and forecast the same growth levels for 2016 and 2017 as the OECD.

Its analysis commended the authorities for responding proactively to cushion the impact of the oil shock on the economy and the financial system.

Provinces with high debt or a deficit should undertake some fiscal consolidation, but only at a gradual pace so as not to offset federal government stimulus, the IMF recommended.

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