IMF slashes Canada's growth outlook on US slowdown

WASHINGTON (AFP) — The International Monetary Fund on Monday slashed a half point from its 2008 Canadian economic growth forecast, to 1.8 percent, mainly due to a weakening US economy.

Despite a sharp slowdown in the final quarter of 2007, the Canadian economy expanded by around 2.5 percent for the full year, buoyed by nearly four percent growth in domestic demand, particularly private consumption and residential investment, the IMF said in a report on Canada.

In its prior forecast in October, the IMF had seen Canada's economy slowing slightly to a 2.3 percent pace in 2008.

However, rapidly deteriorating conditions in its neighbor to the south, where a severe housing slump and a related credit squeeze have nearly stalled the US economy, have affected Canada, the IMF said.

"Growth slowed toward the end of the (2007) year, and is expected to decelerate further to 1.8 percent in 2008 reflecting a sharp downturn in the United States, past currency appreciation, and a tightening of financial market conditions," the IMF said in a report on Canada.

Nevertheless, "domestic demand would likely remain solid," it said, noting "Canada's impressive macroeconomic track record since the mid-1990s, which has been underpinned by sound monetary and fiscal policies and favorable external conditions."

Finance Minister Jim Flaherty said in a statement: "The IMF report shows Canada is an economic leader, and our government is taking steps to ensure continued growth in the face of uncertainty."

The report, he said, "highlights the flexibility of the Canadian economy in adjusting to adverse shocks and notes that our strong fiscal situation puts Canada in an enviable position to take on the economic challenges ahead."

In October, Ottawa announced it would cut the federal debt by 10 billion dollars (Canadian, US) in fiscal 2007-2008, ending March 31 of this year, and by at least three billion dollars each year subsequently.

On March 31, 2007, Canada's national debt dropped to 467 billion dollars, or 32.3 percent of gross domestic product (GDP), compared to 68.4 percent a decade ago.

Ottawa has pledged to reduce the debt-to-GDP ratio to less than 25 percent by 2011-2012.

The IMF also welcomed Canada's "recent measured easing" of monetary policy -- two quarter-point interest rate cuts, in December 2007 and January 2008 -- saying the country's "strong monetary framework, as well as exemplary budgetary performance, have provided room for supportive policy actions."

The downward growth revision was expected because the Washington-based IMF had announced in December it would lower its October forecasts, issued in its twice-yearly World Economic Outlook report, because of the US housing and credit crisis.

In recent days, the IMF has cut a half point off its 2008 growth estimates for Germany and France, to 1.5 percent. In January it trimmed 0.4 percentage points from its forecast for the US, the world's largest economy, to 1.5 percent.

Canada's financial conditions have been "modestly affected" by the spillovers from the global credit crunch, "but uncertainties remain with respect to the impact of further deterioration in US financial market conditions."

The Canadian dollar has appreciated by 45 percent in real effective terms since 2002, the IMF said, noting that "domestic adjustment to the appreciation has been very smooth thanks to the flexible labor markets."

Tuesday, the Canadian government will present its 2008-2009 budget, but Flaherty has already downplayed expectations, saying: "This is a time of limited economic growth where you have to have a solid hand on the tiller."