Gordon Isfeld | November 27, 2013

OTTAWA — First, the good news.

Canada’s economy will accelerate in 2014 — clocking in at a pace of 2.25%, easily overtaking this year’s modest growth of nearly half that, according to the world’s largest lending organization.

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But the not-so-good news from the International Monetary Fund is that household debt — fed by near-record low borrowing costs — continues to cloud Canada’s near-term outlook, given that cheap credit is likely be around for another year or more.

Next year’s economic pick-up — from estimated growth of 1.6% this year —will be powered mainly by a stronger U.S. recovery that will boost Canadian exports and nudge companies to begin spending more on expansion, the IMF said Wednesday.

“Private consumption growth [in 2013] has remained robust thanks to an increase in household wealth and still easy financial conditions, but business investment and exports made no contribution to growth,”

But that’s expected to begin changing next year.

“The combined additional contribution to growth from net exports and business investment will more than offset the anticipated weakening in the contribution from household consumption and residential investment,” said the Washington-based group, which counts 188 countries as members.

The IMF scenario will see households “gradually reduce their debt burden [as] construction activity moderates to levels consistent with demographic trends, and house price growth slows further.”

Wednesday’s outlook from the IMF came on the same day as the Conference Board of Canada issued its own forecast for the domestic economy.  The Ottawa-based think-tank anticipates slightly better growth of about 2.5% both next year and in 2015. It also assumes much of that growth will be powered by higher export volumes

"The domestic economy should keep humming along in 2014 and 2015 thanks to low interest rates and improving business and consumer confidence,” the Conference Board said.  “Better times are in store over the next two years, due to improved outlooks for the U.S. and global economies.”

On the issue of interest rates, meanwhile, the IMF appears in line with the path set by monetary policymakers in Canada, stating the “gradual absorption of the existing economic slack is expected to drive inflation back to [the central bank’s target of] 2% by end-2015, with the policy interest rate projected to increase starting in early 2015.”

Private-sector economists, likewise, expect the first rate increase since September 2010 to come in the first quarter of 2015, at the earliest.  “Policymakers can afford to wait before starting to raise policy rates towards more normal levels. The slowing trends in construction activity, house prices, and household credit, together with the projected increase in long-term rates as the [U.S.] Fed gradually exits from QE [quantitative easing], also give the Bank of Canada more room to wait before raising policy rates,” the IMF argues.

That’s in contrast to the OECD’s call last week for the central bank to begin raising its key interest rate sooner rather than later.  The Paris-based Organization for Economic Co-operation and Development on Nov. 19 said policymakers should begin lifting their benchmark — now at 1% — in the fourth quarter of 2014 and continue raising it to 2.25% by the end of 2015.

It was the Bank of Canada’s near rock-bottom key rate that encouraged consumers to start spending again after the 2008-09 recession. What was also supposed to happen, but didn’t, was for businesses to join the rush to bolster the economy. As well, the expected hand-off from households to companies has been slower than the central bank and federal government had hoped for.

“While residential investment and house price growth continued to moderate in 2013, elevated levels of household debt and high valuations in a number of housing markets remain a potential vulnerability,” the IMF warned.

“Policies should remain focused on sustaining growth until the rotation to exports and business investment gains firmer momentum, while assuring that the gradual unwinding of domestic imbalances continues and that the fiscal position is maintained on a sustainable trajectory.”

In the same report, the IMF noted the federal government’s budget deficit “declined at a faster-than-expected paced in 2012-13, but the impact on growth was partly offset by less restraint at other levels of government, with a number of provinces delaying the return to a balanced budget.”

Not surprisingly, Finance Minister Jim Flaherty welcomed the IMF report, “which highlights the government’s fiscal and financial sector policies and commitment to return to balanced budgets.”

“By reaffirming its support for the government’s plan to return to balanced budgets in 2015, the report provides further support for our government’s fiscal priorities.”