Spinning the IMF report on Canada

The IMF released the results of its Article IV consultation with Canada, giving us an outsider’s take on how well we are handling the global economic crisis. But it is hard to know what to take away if left to the mainstream press, when the business page headline in the Globe and Mail is “IMF dashes hope of short recession” while the Vancouver Sun reports another banner headline that “Canada’s economic policy draws praise from IMF”.

I first saw this story posted yesterday online at the Globe. The print version of the story in today’s paper is somewhat similar but omits an interesting part of the original report:

Finance Minister Jim Flaherty held a news conference as soon as the IMF report was made public, focusing on the glowing reviews it gives Ottawa and the Bank of Canada for their handling of the crisis. “The IMF compliments Canada on what it’s doing,” he said of the report, which was prepared in consultation with the federal Finance Department.

And it would appear that the near-bankrupt CanWest (perhaps not wanting to be too negative in case a government handout is needed) bought that spin. At least in the Vancouver Sun, which quotes the PM up front:

“The IMF supports the strong fiscal package announced in January,” Harper said in the House of Commons, quoting from the IMF report. “The focus now is, appropriately, on implementing that package, so I would encourage the party opposite, rather than always trying to find the negative in everything, to simply get on with passing this and doing something positive for the Canadian economy.”

To be fair, the Sun story adds a dose of reality by noting that the Parliamentary Budget Office is not so sanguine. The online Globe story makes the same point, although the print version leaves the PBO out entirely.

The original online story in the Globe is rather scathing:

Prime Minister Stephen Harper’s upbeat assessment this week of Canada’s prospects for recovering from recession suffered two blows Wednesday after a global authority warned the economy will lose even more steam than expected and a parliamentary watchdog said recent declines are worse than many realize.

The International Monetary Fund issued a report that quashed hopes of a quick recovery for Canada, saying the country’s economy will likely contract rapidly in the months ahead.

And Parliamentary Budget Officer Kevin Page warned that Canada’s economy was hit harder in the final quarter of 2008 than many think, releasing a report that took some of the gloss off Mr. Harper’s comments.

…  The IMF takes issue with the Bank of Canada’s forecast for a rebound of 3.8 per cent in 2010 because it believes Canada’s economy will be plagued by the U.S. financial crisis for some time, staffer Charles Kramer explained. “History tells us that when financial strains tend to be difficult, recovery tends to be slow.”

The print version is more conciliatory but adds:

Canada’s prospects are looking increasingly bleak and recovery is a long way off, the IMF warned. The agency will revise downward its January forecast, which predicted a 1.2-per-cent contraction this year, followed by a limp 1.6-per-cent expansion next year, said the IMF mission chief for Canada, Charles Kramer.

… The fourth-quarter data was a turning point for the IMF’s view of Canada, too, Mr. Kramer said, although he pointed to factors outside Canada’s borders as the drivers. With Japan, the U.S. and the European Union’s economies sinking quickly at the end of the year, Canada, with its dependence on trade, will get hit, he said.

While Canada – with its stable banks, low interest rates and ample fiscal stimulus – is in better shape than other countries to weather the storm, the coming months will be harsh, the IMF warned.

One possible threat: Canada may soon be facing a negative feedback loop. Homeowners are heavily indebted, and as unemployment rises and wealth deteriorates, mortgage delinquencies will also rise, the IMF’s report said. Canada’s banks could respond by scaling back credit, and crimping Canada’s growth even further.

Technically speaking, that would be a “positive feedback loop” (negative feedback is like a thermostat). Still, the key point is that the projections continue to get worse. The IMF estimate for 2009 is the same as the Bank of Canada, but for 2010 it is much worse. Expect some downward revisions from the Bank in the next Monetary Policy Report. Relative to the PBO’s January pre-budget forecast, based on a private-sector average, the IMF forecast is worse in both years.

The March PBO report does not update its forecasts but instead points at Gross Domestic Income (GDI) figures that show our recent performance to be worse than the recent fourth quarter GDP numbers. In the meantime, the strategy on both sides of the Canada-US border appears to be mostly about staying positive. If we keep saying often enough that 2010 will mark the turnaround back to the growth we have come to expect, maybe it will actually happen. By the time we hit 2010 the journalists will have moved on to reporting the latest projections and won’t bother going back to see if today’s rosy talk was accurate.