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IMF: Trade tensions, US tax reform pose risks to Canada growth

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IMF: Trade tensions, US tax reform pose risks to Canada growth

Canada's economic growth could be affected by heightened economic anxiety due to the renegotiation of the North American Free Trade Agreement and the impact of tax reforms in the U.S., the International Monetary Fund said.

Canada's real GDP grew at the highest rate among G7 economies in 2017, rising by 3%. Growth is projected to slow to 2.1% in 2018 and to 2.0% in 2019 as monetary and macroprudential policy tightening effects begin to be felt.

The IMF said Canada's long-term real GDP could be reduced by 0.4% relative to its baseline forecast if NAFTA negotiations fail and Canada reverts to tariff rates under World Trade Organization rules, or even more if non-tariff trade costs increase. Lower corporate tax rates in the U.S. could also reduce Canada's attractiveness as an investment destination, increasing uncertainty about the country's medium-term growth prospects.

"Over the medium term, weak external competitiveness, sluggish labor productivity growth, and population aging are expected to limit potential growth to about 1¾ percent, significantly lower than its historical average," the IMF said.

Canada's economy is experiencing robust growth and higher oil prices and strong U.S. growth should support near-term growth but the country's long-term growth prospects could be affected by weak productivity.

A faster-than-expected rise in mortgage interest rates or a rapid shift in price expectations could trigger a sharp correction in the housing market, a key domestic risk that, if accompanied by higher unemployment and a sharp fall in private consumption, could affect financial stability and growth. The IMF said housing market has shown signs of cooling down in response to monetary tightening and several rounds of macroprudential measures.

The Washington-based lender suggested that Canada's fiscal policy should focus on rebuilding buffers to enhance the economy's resilience to adverse shocks.

"It is time for a careful rethink of corporate taxation to improve efficiency and preserve Canada's position in a rapidly changing international tax environment," the IMF said.

It said tangible progress in further deregulation in some markets, such as electricity, transportation, retail distribution and professional services, should result in higher foreign direct investment and could reduce risks from the U.S. tax reform.