OECD tells Canada it needs to do more to cool its hot

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The Organization for Economic Co-operation and Development says Canada’s economy is growing so fast the country might soon hit full employment, but it remains worried about “overheating” housing markets in Vancouver and Toronto.Canada’s gross domestic product will grow by 2.8 per cent during 2017, double last year’s pace, the Paris-based think-tank projects, fuelled by gains in household wealth, a pick-up in oil and gas industry investment, low interest rates and government spending.“The federal government’s mildly expansionary fiscal stance will hasten the economy’s return to full employment,” the organization said in a report released Wednesday. “The labour market is strengthening. The unemployment rate is down about half a percentage point from a year earlier, and more people are coming into the labour force.”Don’t expect strong first quarter GDP numbers to continue, Capital Economics warns‘Some real problems with Canada’: Muddy Waters founder says Home Capital selloff among nervous-investor signalsStatistics Canada will release its jobs report for May on Friday. The unemployment figure for April was 6.6 per cent, and economists expect little change.But the OECD is concerned about the housing markets in Toronto and Vancouver. The OECD thinks Canada’s economy is expanding fast enough for the Bank of Canada to push interest rates higher toward the end of this year, and is hoping higher interest rates could help cool the housing markets in those cities.Provincial governments in Ontario and B.C. have introduced transfer taxes that aim to ease the Toronto and Vancouver residential real estate markets, but the OECD said the impact from those taxes will likely be short-lived.The OECD is also concerned that a broad expansion of rent controls in Ontario may discourage the construction of new rental buildings. This may actually harm the people Ontario’s new rules are supposed to help, the OECD said. “Low rental supply would hamper labour mobility — particularly for the poor and the young.”But rate hikes and transfer taxes won’t fully address the risks the Canadian economy faces from a “disorderly” housing price correction, the OECD said.The Canadian government last year introduced some rules that are designed to keep riskier borrowers out of the housing market. The OECD said Canada needs to bring even more of this type of “macro-prudential” regulation. For example, it said Canada could use different debt-to-income constraints in regions that have high home prices.“Higher interest rates will take some of the wind out of booming housing markets and rapidly rising house prices,” the OECD said. “Nevertheless, macro-prudential measures, which were strengthened during 2016, should be tightened further to address economic and financial risks related to the housing market.”The OECD’s outlook for Canada is quite bullish. The OECD’s forecast tops the Bank of Canada’s estimate for Canadian growth this year of 2.6 per cent. The OECD also puts the Canadian economy well out in front of the U.S., which the think-tank expects will grow 2.1 per cent this year.Canada’s economy is getting a push from what the OECD described as the federal government’s “mildly expansionary” deficit spending. Federal government spending accounted for 1.9 per cent of Canada’s 2016 GDP, up from 0.8 per cent the year before.But the OECD is also expecting the private sector to drive growth. Business investment dropped sharply after the downturn in the oil and gas sector, but the OECD now sees signs of a “modest” pick-up in investment, particularly if oil remains above US$50 a barrel.Indeed, although the OECD expects Canada’s economy to grow at a slower rate of 2.3 per cent in 2018, it’s looking for boosts in business investment and exports to keep the country’s economy expanding at a rate ahead of inflation.And Canada needs that business investment and export growth. Canada’s recent economic gains have been due to private consumption, housing investments and government spending. The OECD said those increases aren’t sustainable because they haven’t been matched against gains in income or output.The OECD said Canada faces several potential downside risks, chief among them the possibility of a “disorderly” decline in the Toronto and Vancouver housing markets.“Such a correction would reduce residential investment, household wealth and consumption. A sufficiently large shock could even threaten financial stability,” it said.The OECD also cautioned that Canadian export growth could be hit by protectionist measures, such as recently imposed U.S. tariffs on Canadian softwood lumber.Financial Post dhasselback@nationalpost.com twitter.com/vonhasselbach

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