WASHINGTON, USA – On March 12, 2021, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation with Canada.
The Canadian economy was operating at close to capacity and had strong policy buffers when the COVID-19 pandemic hit. Official statistics indicate that over 20,000 lives were lost. Economic and social restrictions put in place since March 2020 have helped to mitigate the first and the second wave of the virus, but they came at significant cost.
The path of the recovery will be inexorably linked to the evolution of the pandemic. Following an estimated contraction of 5.4 percent in 2020, real GDP is projected to expand by 4.4 percent in 2021 as the pandemic fades. The United States recently approved “American Rescue Plan” will further boost Canadian growth. Moreover, higher oil prices and stronger-than-expected pent up domestic demand are important upside risks to the outlook. On the other hand, the recovery could be delayed by new waves of the virus.
The authorities took timely, decisive, and well-coordinated policy actions in response to the pandemic. Canada’s strong history of prudent policymaking afforded it the policy space to respond forcefully to the crisis, helping it to contain the socio-economic impact of the pandemic. The size and scope of policy support has been unprecedented. Direct fiscal support provided by the federal government is expected to amount to almost 15 percent of GDP and includes spending on healthcare, and support for households, firms, and vulnerable groups through cash transfers and wage subsidies.
In addition, the federal government provided liquidity support through tax deferrals, credit facilities, and loan guarantees. At the same time, the Bank of Canada responded by cutting its policy interest rate to an historical low and announced a range of programs to support liquidity in the financial system. An array of other financial sector policies was also deployed to support banks, insurers, and pension funds.
Executive board assessment
Executive recognized that Canada’s strong history of prudent policymaking and ample buffers provided the authorities the policy space to respond forcefully to the COVID-19 pandemic. Directors noted that the recovery now hinges on the evolution of the pandemic and encouraged the authorities to continue to use public health measures to combat the virus while maintaining adequate policy support. At the same time, structural reforms should continue to focus on promoting a green and inclusive economy.
Directors noted the authorities’ intention to review the employment insurance system, including its role as an automatic stabilizer. They welcomed the authorities’ data-driven approach to the withdrawal of policy support, but saw scope for greater clarity about the conditions that would trigger such withdrawal. Addressing gaps in the social safety net would also be important going forward.
Directors encouraged the authorities to communicate the medium-term fiscal objectives more clearly. Noting that there may be need for continued fiscal support, as well as the recent rise in public debt, they generally considered that introducing a fiscal anchor, that clearly illustrates fiscal sustainability, would help strengthen the credibility of the fiscal framework.
Directors welcomed the Bank of Canada’s communication strategy for maintaining and eventually withdrawing policy support and agreed that current monetary policy settings are broadly appropriate. Scaling back policy support once a recovery is firmly entrenched will promote financial stability and help to build policy space. Directors emphasized that clear and credible communication will be key to managing expectations.
Directors agreed that current macroprudential policy settings are broadly appropriate. The withdrawal of policy support should carefully balance short-term risks to growth and financial stability against longer-term vulnerabilities, including those emanating from a persistent buildup of leverage and rising house prices.
Directors emphasized that beyond the pandemic, it is important to continue to implement structural reforms to boost productivity, diversify beyond traditional sectors, and transition to a greener and more equitable economy. They commended Canada’s commitment to fighting climate change.
Directors welcomed progress towards implementing recommendations from the 2019 Financial Sector Assessment Program. Looking ahead, it will be important to address outstanding macro-critical recommendations, particularly those related to regulatory capital requirements for mortgage exposures and ensuring that mortgage insurers are adequately capitalized.