OTTAWA - The Canadian government and central bank should be prepared to act swiftly with additional stimulus if the economy unexpectedly deteriorates further, the International Monetary Fund said Friday.
In a new assessment of Canada's economic prospects, the IMF said the country is in better position than most to weather the economic storm, but added the near-term outlook "will be challenging."
And if conditions do deteriorate, both the federal government and the Bank of Canada should take action quickly, the IMF said.
"Given Canada's strong fiscal position - with the lowest debt-to-GDP (gross domestic product) ratio among G-7 countries - and the authorities' commitment to medium-term structural surpluses, further fiscal expansion would not put at risk debt sustainability," the fund said.
The IMF's assessment comes as the Canadian economy received a mild boost from new retail sales figures showing consumers emerged from hibernation in March.
Retail sales increased for the third straight month in March, rising modestly by 0.3 per cent on the strength of a six per cent increase in the purchase of new automobiles.
As well, the Canadian dollar continued to soar in comparison to the weakening U.S. current, finishing the day at 89.26 cents U.S., up 1.39 on the day, at its highest point since October.
A strong loonie is a mixed blessing for Canada because it is normally an indication of improved global conditions that would support commodity exports, but serves to undermine the competitiveness of Canadian manufactured exports.
Economists called the retail sales number only mildly encouraging, however - a 0.7 per cent hike in volume sales suggest consumers were only drawn to stores and car dealerships by large bargains - but likely enough to avoid the most dire estimates of Canada's first quarter performance.
"I think we've put to bed the notion that the first quarter hit could be as large as nine or 10 per cent (contraction), which was some of the scare talk earlier in the year," said Derek Holt, vice-president of economics with Scotia Capital.
"Now we're only looking at about 6.5 per cent contraction."
That would still be the biggest quarterly decline in GDP since records began being kept in 1961, beating the 5.9 per cent fall-off in the early 1990s.
The Bank of Canada has estimated the economy shrank at a 7.3 per cent annual pace during the first three months of 2009, although the actual number won't be known until June. 1.
In a statement, Finance Minister Jim Flaherty suggested the $40-billion over two years earmarked in this year's federal budget will be sufficient to pull the country out of recession.
"I am working with my provincial colleagues to ensure that Canada's Economic Action Plan is implemented as quickly as possible," he said. "I am convinced that the plan will make a real difference for Canadians and allow us to emerge from this global recession in a much stronger position."
The IMF was mostly laudatory about government action taken so far to help the economy.
It also praised the Bank of Canada for taking aggressive steps, including committing to keep the policy rate at the practical lowest bound of 0.25 per cent for a year, but added under a "downside scenario" the bank should consider "unconventional measures."
That refers to the central bank's own statement that among its remaining options, since it can't cut rates further, is so-called quantitative and credit easing, which could involve pumping up the money supply to buy up government and corporate bonds.
Such measures are already in place in the U.S. and Britain and have helped ease credit.
The IMF outlook for the Canadian economy differs slightly from the Bank of Canada's, being less pessimistic for this year but more so for next.
The international body says Canada's economy will shrink 2.5 per cent this year and grow a muted 1.2 per cent in 2010, whereas the Canadian central bank sees the contraction hitting three per cent this year, but postulated a stronger 2.5 per cent rebound next.