Canada is at risk of a “disorderly” correction in the housing market that could threaten the country’s financial stability, the OECD warned on Monday in its latest global economic outlook.
The risk of a housing correction is most acute in the “over-valued” Vancouver and Toronto markets, the Organisation for Economic Cooperation and Development said, citing the potential difficulty for some debt-ridden households to make mortgage payments if interest rates or unemployment rise.
“Such a correction would reduce residential investment and, through wealth effects, private consumption, and in an extreme case could threaten financial stability,” the OECD said.
The group also said Canada’s federal budget this year gives the Bank of Canada leeway to raise rates to tame financial stability risks.
"The moderately expansionary policy stance in the 2016 federal budget will help to speed the economy’s return to full employment," the OECD said. "It also increases scope to raise interest rates, which would mitigate financial stability risks arising from high and rising house prices and household debt.”
Canadian economic growth is projected to increase to 2.1 per cent next year from 1.2 per cent in 2016, and reach 2.3 per cent in 2018, the organization said.
The projections by the OECD are slightly more optimistic than the latest outlook from the Bank of Canada, which last month estimated the country's gross domestic product would grow by 1.1 per cent this year and two per cent in 2017.
FASTER GLOBAL GROWTH
Global growth will pick up faster than previously expected in the coming months as the Trump administration's planned tax cuts and public spending fire up the U.S. economy, the OECD said on Monday, revising up its forecasts.
In its twice-yearly economic outlook, the OECD estimated global growth would accelerate from 2.9 per cent this year to 3.3 per cent in 2017 and reach 3.6 per cent in 2018.
The Paris-based organization was slightly more optimistic about the U.S. outlook, with a forecast for growth next year of 2.3 per cent, up from 2.1 per cent in its last set of estimates dating from September.
U.S. growth would pick up further in 2018 to reach 3.0 per cent, the highest rate since 2005, as the incoming Trump administration cut taxes on business and households and embarked on an infrastructure investment program.
That would in turn drive the unemployment rate in the world's biggest economy down from 4.9 per cent this year to 4.5 per cent in 2018, the OECD estimated.
As the U.S. labour market becomes increasing tight and wages rise, the OECD forecast inflation would increase from 1.2 per cent in 2016 to 2.2 per cent in 2018, prompting the Federal Reserve to raise interest rates gradually to 2.0 per cent by end-2018.
A resurgent U.S. economy would help offset softness elsewhere in the world.
The OECD was slightly less pessimistic about Britain's outlook than it was in September, as the central bank has helped ease the economic impact of the country's decision to leave the European Union.
Britain's economy was seen growing 2.0 per cent this year, revised up from 1.8 per cent previously, although the rate would be halved by 2018.
China, which is not a member of the 35-country OECD, was seen slowing from growth this year of 6.7 per cent to 6.4 per cent in 2017, both slightly better than previously expected.
Stronger U.S. import demand was seen offsetting weak Asian trade for Japan, where growth was revised up to 0.8 per cent for this year from 0.6 per cent previously and lifted to 1.0 per cent in 2017 from a 0.7 per cent estimate in September.
The euro area's outlook was also slightly brighter despite uncertainties about Britain's future relationship with the continent.
Boosted by loose monetary policy, euro area growth was seen at 1.7 per cent this year and 1.6 per cent in 2017 with both years revised slightly higher from the OECD's September estimates.
With files from BNN, The Canadian Press