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Growth sputters thanks to cooling housing market

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OTTAWA -- Canada's economic growth will be the slowest among Group of 20 countries outside Europe as it grapples with a cooling housing market and as policy-makers rein in deficits, the International Monetary Fund said.

The Washington-based lender cut its 2013 Canadian growth forecast to 1.5 per cent, from an October estimate of two per cent, while boosting its projections for Japanese growth to 1.6 per cent. The U.S. economy will grow at a 1.9 per cent pace this year, while the euro area contracts by 0.3 per cent, the fund said Tuesday in its World Economic Outlook.

Canada's economy is expanding at the slowest pace since 2009 as the housing boom that helped lift it from recession cools and high household-debt levels constrain demand.

Canadian policy-makers, who have sought to stem increases in household borrowing and cut government spending, should be prepared to take growth-supporting measures if the nation's economy continues to weaken, the IMF said Tueday.

"High household debt and continued moderation of the housing sector will restrain domestic demand," the IMF said. "The main challenge for Canada's policy-makers is to support growth in the short term, while reducing the vulnerabilities that may arise from external shocks and domestic imbalances."

That could mean allowing budget deficits to widen and keeping the Bank of Canada's policy interest rate at one per cent for longer, it said.

The IMF predicts Canada's economy will grow 2.4 per cent next year. Last year, it expanded 1.8 per cent.

Finance Minister Jim Flaherty pledged last month to balance his budget in the fiscal year that begins April 2015, while the Bank of Canada has maintained a bias toward raising its benchmark interest rate for almost a year.

"Although fiscal consolidation is needed to rebuild fiscal space against future shocks, there is room to allow automatic stabilizers to operate fully if growth were to weaken further," the IMF report said. "The current monetary policy stance is appropriately accommodative, and the beginning of the monetary tightening cycle should be delayed until growth strengthens again."

The IMF said risks to its forecasts for Canada are "tilted to the downside," citing concerns the weakness in the U.S. and Europe could hurt the economy.

-- Bloomberg News

Republished from the Winnipeg Free Press print edition April 17, 2013 A10

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