The International Monetary Fund says the prospects for Canada's economy are "broadly favourable," but warned of risks to that forecast.

The international body said Monday that after a strong initial jump out of the recession in early 2009, growth in Canada's economy has moderated. Echoing the refrain of policy makers in Ottawa, the IMF said Canada is faring comparatively well to its global peers.

But "risks are tilted to the downside given the challenging external environment," the agency said in a report on Canada's economy.

Chief among those risks are headwinds from financial market spillovers of turmoil in Europe; a weaker U.S. economy; lower commodity prices under a scenario of weaker global activity and a high Canadian dollar.

Debt, low rates a concern

In particular, the IMF said household debt levels remain a concern.

"Household debt is at a historical high relative to disposable income, and various indicators suggest that house prices in some regions are above levels consistent with economic fundamentals," the report said.

The IMF says it expects Canada's economy to grow by about two per cent this year and next. That's slightly behind what it was expecting earlier this year, but still well ahead of what it expects for several industrialized nations.

"[But] In an uncertain global economic environment, macroeconomic policies should react quickly and flexibly to significant changes in the economic outlook," the report said.

Far from hiking them, that means policymakers at the Bank of Canada should stand ready to lower interest rates from their current level of one per cent if necessary.

And the agency gave credit to provincial and federal governments for outlining plans to return to balanced budgets as soon as possible.

Threat to banks

The federal government currently expects to return to a balanced budget by the 2014-2015 fiscal year. Finance Minister Jim Flaherty welcomed the IMF report on Monday, saying the agency's cautious optimism is a testament to the government's focus on the economy.

"IMF is maintaining its positive outlook for Canada," Flaherty said in a statement. "Given that global economic growth has weakened, the IMF continues to support our flexible and pragmatic approach to returning to balanced budgets in the medium term."

The agency says Canadian banks remain solid and well-managed. But the report expressed concern that consistent low interest rates could cause problems for them in the long run by encouraging excessive borrowing and risk-taking.

"A continuation of a low-interest rate environment would also present challenges for the solvency of pension funds with defined benefits," the report warned.