Canada's economy is facing "significant risks" as high anxiety from trade tensions with the U.S. and the threat of correction in the housing market weighs on growth, according to the latest outlook from the International Monetary Fund.
The Washington-based agency said on Monday that policymakers need to "rebuild policy buffers" and forge ahead with structural reforms to boost Canada's global competitiveness.
"Economic anxiety is high due to trade tensions, uncertainty about the outcome of NAFTA negotiations, and the impact of the U.S. Tax Cuts and Jobs Act on Canada's medium-term competitiveness," the IMF said in a report.
"Near-term growth will be supported by higher oil prices and strong U.S. growth, but weak productivity continues to weigh on longer-term prospects."
Canada's gross domestic product (GDP) could be reduced by 0.4 percentage points or more if the U.S. and Canada fail to reach a NAFTA agreement and trade between the two countries reverts back to World Trade Organization (WTO) rules, the IMF said.
Added to that, the IMF expects growth in the Canadian economy to slow to 2.1 per cent in 2018 and then two per cent in 2019, from three per cent last year.
"Tax cuts and stronger government spending in the U.S. are expected to support demand for Canadian exports in the near-term and contribute to a narrowing of the current account deficit," it said.
"Over the medium-term, weak external competitiveness, sluggish labour productivity growth, and population aging are expected to limit potential growth to about 1¾ per cent, significantly lower than its historical average."
The warning from the IMF comes as trade tensions between the two countries hit a fever pitch last week when the U.S. slapped aluminum and steel tariffs on Canadian imports after an initial exemption. The Canadian government then retaliated with surtaxes of its own on $16.6 billion worth of U.S. goods.
The IMF said external risks to Canada's economy are now "more acute" than in the recent past as a result of policy changes in the U.S., along with the fallout from NAFTA talks.
"Likewise, the medium-term impact of lower tax rates in the U.S. could make Canada a less attractive destination for investment, leading to heightened uncertainty about Canada's medium-term growth prospects," it said.
Meanwhile, a key domestic risk to the economy is a "sharp correction" to the housing market that could be triggered by faster-than-expected rise in mortgage interest rates, the agency said.
"While the banking system is profitable, it is heavily exposed to household and corporate debt," the IMF said. "In this context, risks to financial stability and growth could emerge, if the house price correction is accompanied by a rise in unemployment and sharp contraction in private consumption."
Data from the Toronto Real Estate Board on Monday showed that home sales in Canada's largest city — the Greater Toronto Area — fell more than 22 per cent in May, compared to last year.
Meanwhile, the Real Estate Board of Greater Vancouver said that home sales in Metro Vancouver — the country's most expensive property market — fell more than 35 per cent in the same period.
The Bank of Canada is widely expected to raise its benchmark interest rate in July.