The International Monetary Fund expects the Canadian economy to grow at an annual rate of 2.75% by the middle of next year, helped by strong domestic demand.

“The strong performance of the Canadian economy appears likely to continue, notwithstanding some recent slowing in growth,” the IMF wrote in the preliminary conclusions of consultations on the Canadian economy.

It said that strong household and corporate balance sheets suggest Canada’s domestic economy could “surprise on the upside” but cautioned that a “key downside risk” would be a larger-than-anticipated slowing of activity in the United States, especially in the auto sector.

The IMF praised the Bank of Canada for balancing those risks and putting interest rates on hold since May and said it expects inflation to stay at about 2%.

The IMF suggested that the federal government should cut income taxes instead of the goods and services tax.

“Marginal income tax rates are high by international standards, suggesting that reductions in this area would provide larger efficiency gains than further cuts to the goods and services tax (GST),” the IMF said.