The IMF cut Canada’s growth outlook — but Deloitte says its forecast is still too optimistic

Canada’s growth prospects are bleaker than they were at the start of 2019, according to the International Monetary Fund’s latest outlook, which lands amid speculation over whether a global recession is coming.

The IMF cut its growth estimate for Canada to 1.5 per cent in 2019, down from its previous estimate of 1.9 per cent growth in January, according to the World Economic Outlook report published Tuesday.

Canada is not alone in the expected slowdown. In fact, the IMF cut its overall global growth forecast to 3.3 per cent for 2019, down from its prediction of 3.5 per cent in January and a dip from global growth of 3.6 per cent in 2018. Growth peaked at about 4 per cent in 2017.

The organization blamed the rockier outlook on U.S.-China trade tensions, problems in Germany’s auto sector, tighter credit policies in China, uncertainty around Brexit and financial vulnerabilities in advanced economies. In Canada, it found trade conflicts and the oil price rollercoaster have had a particular impact.

While there’s increasing hope that trade issues could be resolved, the IMF said the “risks are tilted to the downside.”

“A further escalation of trade tensions and the associated increases in policy uncertainty could further weaken growth,” the report stated. “The potential remains for sharp deterioration in market sentiment.”

However, Canada is poised to benefit from the trade dispute between the world’s two most powerful economies.

“Trade diversion leads to substitution of China’s exports to the United States: Mexico and Canada benefit most, reflecting their close proximity to, and strong trade relations with, the United States,” the IMF said.

The IMF expects global growth will return to 3.6 per cent in 2020. It predicts growth in Canada will pick up to 1.9 per cent by then.

But Deloitte Canada chief economist Craig Alexander painted a more pessimistic picture in his April economic outlook, also released Tuesday.

“They’re too optimistic,” Alexander said on the IMF report in an interview.

Alexander expects Canadian growth to top out 1.3 per cent in 2019 and improve only slightly to 1.5 per cent in 2020, lower than both IMF estimates and the 1.8 per cent five-year average growth rate estimated in the 2019 federal budget.

“The reality is that many people’s expectations of what represents good growth is actually too high,” Alexander said.

The biggest challenges facing the Canadian economy are the impact of lower commodity prices on the energy sector and the fact that debt-laden consumers are no long fuelling growth with big retail and real estate purchases, Alexander said.

“If you think over the last 10 years since the economic recovery began, really consumers have done a lot of the heavy lifting,” he said.

That changed last year with the introduction of the mortgage stress tests. But exports and foreign direct investment haven’t boomed to make up for it despite the low Canadian dollar.

Even if some Canadian industries benefit from U.S. tensions with China, Deloitte believes businesses are being very conservative in their investment plans given uncertainty over when (or whether) the USMCA will be ratified. Volatility in financial markets has also inspired cautious behaviour, Alexander said.

On top of this, it has been 10 years since the last recession. Most business cycles last about eight to 10 years. In late March, analysts noted a brief yield curve inversion – a typical harbinger of recession.

While a “dreaded R word (recession)” isn’t believed to be the most likely outcome, Deloitte isn’t ruling out a contraction. Canada needs to work on its competitiveness in the long run, including in its tax and regulatory regimes, to encourage investment, Alexander said.

Other economists are calling for a more nuanced look at indicators that seem negative. TD Economics chief economist Beata Caranci doesn’t think investors should fret as much over net outflows in foreign direct investment.

While the energy sector is often used as a poster child of “foreign investor skittishness,” areas such as manufacturing have seen inflows of foreign direct investment, Caranci wrote in a Tuesday report.

International investments by Canadian financial and insurance institutions “occurred from a position of strength and ultimately reflects the large growth opportunities outside Canadian borders.”

• Email: ejackson@nationalpost.com | Twitter: theemilyjackson



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