The problem with the IMF’s assessment of Canada
To be honest, it would be awfully easy to embrace the most recent apocalyptic clatter emanating from the ivory towers of the International Monetary Fund. It’s always fun to stroke your metaphorical beard and declare that we’re all going to hell in a handcart. Or whatever the equivalent economic jargon of the moment may be.
The IMF recently provided some dramatic — if slightly shop-worn — proclamations to work with: the world economy faces “alarmingly” high risks of an even steeper slowdown. It will grow just 3.3 per cent this year rather than the 3.5 per cent previously forecast, with a one in six chance of sliding below two per cent growth.
As for Canada, the frothy housing market and the high level of household debt came in for a special scolding, along with the warning that the federal government may have to intercede if things continue on the same track.
The IMF also helpfully pointed out that Canada’s reliance on the U.S. market, and the “deep economic and financial linkages” between the two countries, poses a problem. Specifically, if the “fiscal cliff” of U.S. government spending cutbacks coincides with continued torpor in the private sector, Canada will be hard hit.
As a result, the IMF is predicting Canada’s economy will grow 1.9 per cent this year and 2.0 per cent next year, down 0.2 per cent in each case. Unemployment, furthermore, will stay stuck at 7.3 per cent.
It’s just the sort of thing to get folks riled up and to spawn a few dire columns rife with clichés about how we really need to pull up our socks, suck in our guts and get our houses in order. And so on.
That sort of pontificating would, of course, overlook the IMF’s relatively dodgy track record since it was formed to stabilize the wobbly world economy after World War II.
For one thing, it has consistently failed to flag the formation of dangerous economic bubbles (technology stocks and housing most recently) in a timely manner. For another, it tends to enable discredited governments and policies with loans that can delay the tough reforms required to address fundamental problems. (Greece is a good, current example.)
Then there are the issues related to the quality of the loans the IMF has made — and to whom. And as for former IMF head Dominique Strauss-Kahn and the damage he did in plain sight of IMF officials, there’s not much to add to the record.
While it’s gracious of the IMF to share its insights, Canada is already acutely aware of the implications of a weaker world economy on the demand for natural resource exports and the consequences of high personal debt loads at a time of economic uncertainty.
But setting aside the IMF’s contribution to our collective wisdom, there are a number of recent, independent indicators that are more credible. And far more worrisome.
By far the most disconcerting piece of the puzzle is the news that the methodology for valuing and insuring Canadian mortgages may be imprecise.
* Video: Home price data flawed?
By relying heavily on an automated database of local average prices, it seems the Canada Mortgage and Housing Corporation — which insures mortgages — may have been over-generous in valuations.
That means that many Canadian homeowners may have taken on more debt than they should for the property in question. It also means that the banks making the mortgage loans may not have quite the same collateral they had calculated.
It also has the potential to rattle the confidence – or at least raise some tough questions – about the much-vaunted prudence of Canada’s domestic financial sector. The size and the length of CMHC mortgages have already been curtailed a few times by the Finance Minister, but the case for stronger measures may now be in the works.
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