The Washington, D.C.-based International Monetary Fund (IMF) is slashing its outlook for the Canadian economy amid weaker than expected growth in the first quarter (Q1).
Canada will see gross domestic (GDP) growth of just 1.5% this year, which is down by 0.7 percentage points from its previous outlook in April, the IMF predicts in its outlook released on Thursday.
For 2016, the IMF sees growth rebounding to 2.1%, up by 0.1 percentage points from its April forecast.
Overall, the IMF is also trimming its global forecast for 2015 by a much more modest 0.2 percentage points to 3.3%, citing weakness in Q1, particularly in North America, as the reason for the downgrade. Growth in Q1 came in at just 2.2%, which was 0.8 percentage points lower than the IMF’s April forecast, it notes.
“The shortfall reflected to an important extent an unexpected output contraction in the U.S., with attendant spillovers to Canada and Mexico,” the IMF says in the outlook.
However, this unexpected weakness in North America, “is likely to prove a temporary setback,” the IMF says. Despite the slightly dimmer outlook, the IMF expects a gradual pickup in advanced economies and a slowdown in emerging-market and developing economies to characterize growth this year, the IMF’s forecasts says. In 2016, growth is expected to strengthen to 3.8%.
“The underlying drivers for a gradual acceleration in economic activity in advanced economies — easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices and improving confidence and labor market conditions — remain intact,” the IMF notes in its outlook.
In contrast, emerging-market economies are expected to slow, driven by several factors, including lower commodities prices, tighter external financial conditions, structural bottlenecks, rebalancing in China and geopolitical concerns, the IMF says in its outlook.
The risks to its latest outlook are still tilted to the downside, the IMF cautions: “Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging-market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth.”
On the policy front, “accommodative monetary policy [in advanced economies] should continue to support economic activity and lift inflation back to the target,” the IMF says.
For governments with fiscal room to maneuver, the IMF recommends that “the near-term fiscal stance should be eased, especially through increased infrastructure investment.” Structural reforms also remain urgent across advanced economies, it adds.