Canada will continue to outperform most economically advanced countries over the next two years, even as the pace slows and risks mount, the IMF says.
The International Monetary Fund’s latest forecast presents Canada as a relative sea of tranquility amid rising global turbulence from European and U.S. debt issues, the aftermath of Japan’s natural disasters, and growing inflationary pressures.
This will result in growth in advanced countries of about 2.5 per cent this year, it says, about half a point lower than last year. And emerging economies as a group will suffer a one-point drop in growth to 6.5 per cent.
As well, the downside risks to the outlook have risen sharply since the IMF’s previous report in April.
“The balance of risks point down more,” it says. “Downside risks due to heightened potential spillovers from other further deterioration in market confidence in the euro area periphery have risen. Market concerns about possible setbacks to the U.S. recovery have also surfaced.
The report doesn’t mention Greece by name but the potential for its government to default on its massive debts — amid public opposition to austerity measures required by its lenders — have been unsettling financial markets.
“If these risks materialize, they will reverberate across the rest of the world — possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies,” it adds.
Despite this, the international financial organization sees Canada trundling along with 2.9 per cent growth this year, and 2.6 per cent next, virtually unchanged since it’s previous forecast. Those numbers are also identical to the Bank of Canada’s call, made in April.
The projections are in line with a new forecast from the TD Bank, which also sees the global economy slowing but Canada hanging on with 2.8 per cent and 2.5 per cent growth rates this year and next.
Among G7 nations, the IMF sees only Germany doing better with an expected 3.2 per cent expansion this year, but slowing to two per cent next year.
All the forecasters point to a soft spot in the economy occurring at this very moment, in part due to supply-chain disruptions from the Japan disaster.
For Canada, the lull will result in the economy slowing to just over one per cent during this current quarter, from a strong 3.9 per cent in the first three months of 2011.
Friday’s Statistics Canada report that wholesale fell 0.3 per cent in April, in volume terms, adds to the narrative of a struggling economy.
However, the vast majority of analysts view the lull as temporary.
“The fundamental drivers of growth remain in place: overall still-accommodative macroeconomic conditions, pent-up demand for consumer durables and investment, and strong potential growth in emerging and developing economies,” concludes the IMF analysts.
The big change in the report is the IMF’s alarm about future risks. It makes clear the world has come out of the recession, but is not all the way out of the woods yet.
It warns of a heightened potential for negative consequences from the European debt crisis, and fiscal hangovers in the U.S. and Japan.
The IMF says the two economic powerhouses must get their fiscal houses in order.
“For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,” the group says, offering the same advice to Japan.
Earlier this week, Finance Minister Jim Flaherty offered a similar assessment in a speech in New York, warning that not only America’s economy would be impacted by failure to address the problem, but Canada’s and the world’s.