Economy
Inflation, housing, Russia: Here’s where the IMF says Canada’s economy is most at risk
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Canada is relatively well-positioned following years of economic upheaval but is still at risk of tipping into a “mild recession” or even steeper downturn, according to an assessment by the International Monetary Fund (IMF).
The report released Thursday positions the Canadian economy as an outperformer among its G7 counterparts.
The country has come through the COVID-19 pandemic “relatively well,” thanks in no small part to widespread compliance with public health measures and strong vaccine uptake, the report said.
And while most world economies have been affected by Russia’s war in Ukraine and the resultant disruptions to the global supply chain, Canada’s position as a commodity exporter means it has been “hit less hard” than other countries.
With both fiscal and monetary policy tightening in 2022, the IMF expects Canada’s economy will slow in the years ahead compared with the roaring return from the pandemic recession.
6:13
Canadians lacking faith in economy as grocery bills soar
Unemployment is expected to rise to around 6.2 per cent as inflation returns to roughly two per cent by the end of 2024, according to IMF projections, which largely align with forecasts from both the Bank of Canada and the Liberal government.
Finance Minister and Deputy Prime Minister Chrystia Freeland on Thursday pointed to the report as proof-positive that the federal government is ready to navigate stormy economic waters.
“As we contend with the pandemic’s aftershocks, this remarkable economic recovery has allowed us to reinforce Canada’s social safety net without pouring fuel on the fire of inflation. And critically, it means that Canada faces the global economic slowdown from a position of fundamental strength,” she said in a statement.
But the IMF also outlines a series of risks to Canada’s outlook — both external factors and some unique to the Canadian economy — that could push the country into a steeper downturn than forecast.
Home prices at ‘unsustainable heights’ during pandemic
The IMF said the rise in interest rates through 2022 has “triggered a welcome housing correction” after home prices rose to “unsustainable heights during the pandemic.”
The report said the run-up in home prices through the first half of 2021 was “fully explained” by the “historically low” mortgage rates on offer and the growing incomes of most Canadian households during the economic recovery.
With higher rates now cooling the housing market, the IMF expects home prices in Canada to drop 20 per cent or more from their peak to trough before settling.
As of October, the average home sale price in Canada has declined 18 per cent on a seasonally adjusted basis from the peak in February, according to figures from the Canadian Real Estate Association (CREA).
The report states that the financial system is “likely to remain resilient” even as costlier mortgages weigh on Canadian households, but the IMF also flags a need to boost the supply of housing to properly address affordability.
Inflation could prove stickier
The annual inflation rate in Canada eased to 6.9 per cent in October, down from the peak of 8.1 per cent in June but still well above the Bank of Canada’s target of 2.0 per cent.
While the IMF agrees with the central bank’s timeframe for returning inflation levels to target within two years’ time, the job “could prove more challenging than expected,” the report states.
If inflation stays higher than baseline past 2024, or if expectations de-anchor and the Bank of Canada is forced to push its policy rate even higher to keep consumer and business confidence in its mandate, the economy could slow more than currently anticipated.
“This would result in slower growth as well as a faster housing correction,” the IMF report reads.
Further spillover from Russia’s war and other global risks
While the IMF said Canada’s economy has been more resilient to disruptions from Russia‘s war in Ukraine, a prolonged conflict nonetheless poses a threat to the economic outlook.
Continued commodity price volatility adds to the uncertainty of the war’s impact, and the possible need for additional sanctions on Russia could hurt Canadian trade prospects, the IMF said.
Broader conflicts like this and a reduction in international co-operation threaten to fracture the existing global financial system, the IMF notes.
Canada should continue to push its co-operative approaches on the world stage, the fund argues, through multilateral trade agreements and joint efforts for climate change mitigation.
Other threats to Canada’s outlook include additional COVID-19 outbreaks in less vaccinated countries and the risk of cyberattacks compromising physical or digital infrastructure.
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China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.
That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programs, though question-marks remain — including how much the government will spend.
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German business sentiment improved to its highest level in a year — reinforcing recent signs that Europe’s largest economy is exiting two years of struggles.
An expectations gauge by the Ifo institute rose to 89.9. in April from a revised 87.7 the previous month. That exceeds the 88.9 median forecast in a Bloomberg survey. A measure of current conditions also advanced.
“Sentiment has improved at companies in Germany,” Ifo President Clemens Fuest said. “Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.”
A stronger global economy and the prospect of looser monetary policy in the euro zone are helping drag Germany out of the malaise that set in following Russia’s attack on Ukraine. European Central Bank President Christine Lagarde said last week that the country may have “turned the corner,” while Chancellor Olaf Scholz has also expressed optimism, citing record employment and retreating inflation.
There’s been a particular shift in the data in recent weeks, with the Bundesbank now estimating that output rose in the first quarter, having only a month ago foreseen a contraction that would have ushered in a first recession since the pandemic.
Even so, the start of the year “didn’t go great,” according to Fuest.
“What we’re seeing at the moment confirms the forecasts, which are saying that growth will be weak in Germany, but at least it won’t be negative,” he told Bloomberg Television. “So this is the stabilization we expected. It’s not a complete recovery. But at least it’s a start.”
Monthly purchasing managers’ surveys for April brought more cheer this week as Germany returned to expansion for the first time since June 2023. Weak spots remain, however — notably in industry, which is still mired in a slump that’s being offset by a surge in services activity.
“We see an improving worldwide economy,” Fuest said. “But this doesn’t seem to reach German manufacturing, which is puzzling in a way.”
Germany, which was the only Group of Seven economy to shrink last year and has been weighing on the wider region, helped private-sector output in the 20-nation euro area strengthen this month, S&P Global said.
–With assistance from Joel Rinneby, Kristian Siedenburg and Francine Lacqua.
(Updates with more comments from Fuest starting in sixth paragraph.)
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When Moscow resident Zoya, 62, was planning a trip to Italy to visit her daughter last August, she saw the perfect opportunity to buy the Apple Watch she had long dreamed of owning.
Officially, Apple does not sell its products in Russia.
The California-based tech giant was one of the first companies to announce it would exit the country in response to Russian President Vladimir Putin’s full-scale invasion of Ukraine on February 24, 2022.
But the week before her trip, Zoya made a surprise discovery while browsing Yandex.Market, one of several Russian answers to Amazon, where she regularly shops.
Not only was the Apple Watch available for sale on the website, it was cheaper than in Italy.
Zoya bought the watch without a moment’s delay.
The serial code on the watch that was delivered to her home confirmed that it was manufactured by Apple in 2022 and intended for sale in the United States.
“In the store, they explained to me that these are genuine Apple products entering Russia through parallel imports,” Zoya, who asked to be only referred to by her first name, told Al Jazeera.
“I thought it was much easier to buy online than searching for a store in an unfamiliar country.”
Nearly 1,400 companies, including many of the most internationally recognisable brands, have since February 2022 announced that they would cease or dial back their operations in Russia in protest of Moscow’s military aggression against Ukraine.
But two years after the invasion, many of these companies’ products are still widely sold in Russia, in many cases in violation of Western-led sanctions, a months-long investigation by Al Jazeera has found.
Aided by the Russian government’s legalisation of parallel imports, Russian businesses have established a network of alternative supply chains to import restricted goods through third countries.
The companies that make the products have been either unwilling or unable to clamp down on these unofficial distribution networks.
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