Housing prices are hurting Canada's middle class, OECD warns
GDP expected to grow 1.2% in 2016, but economy to pick up pace next year
Canada's economy is on the upswing, but Canadian households remain vulnerable because of debt and high housing prices, according to the latest report on the economy by the Organization for Economic Co-operation and Development.
The Paris-based intergovernmental agency said Canada's economy has adjusted to the fall in commodity prices, with activity shifting from the energy to non-energy sectors. It predicted Canadian GDP would grow 1.2 per cent in 2016 and 2.1 per cent in 2017, a rate slightly more optimistic than the latest predictions from the Bank of Canada.
- OECD cuts outlook for global economy, and Canada's too
- Bank of Canada says economic conditions don't warrant rate change
But it warns middle-class families in Vancouver and Toronto are being squeezed by high housing prices, leaving them vulnerable to higher rates or a correction in prices.
It acknowledges recent changes in mortgage rules which could discourage buyers from entering these expensive markets, but urges "regionally focused measures" to further help with housing affordability.
The report also warns against high levels of consumer debt.
A sustained period of low interest rates has encouraged Canadians to take on more credit, "with household debt continuing to edge up from already high levels," the OECD said.
OECD likes infrastructure spending
The OECD supports the federal fiscal stimulus plan, and said the government should "increase federal investment in physical infrastructure, social housing, education and innovation, as planned."
In fact, OECD Secretary General Angel Gurría urged other countries to use the fiscal tools available to boost growth.
"The global economy has the prospect of modestly higher growth, after five years of disappointingly weak outcomes," he said.
"In light of the current context of low interest rates, policymakers have a unique window of opportunity to make more active use of fiscal levers to boost growth and reduce inequality without compromising debt levels."
In 2015, Canada was hurting because of low oil prices, the OECD said, but it believes the economy has now turned a corner.
While business investment has fallen sharply in the energy sector, and unemployment is up in oil-producing provinces, the OECD said other areas of the economy are making up for it.
A lower Canadian dollar, flexible labour markets and monetary and fiscal policy are supporting the shift towards non-resource production, especially in the export sector, it said.
Mixed outlook on the U.S. under Trump
While China's economy is expected to drift lower over the coming year, the OECD predicts an upturn in U.S. growth, which could present opportunities for Canadian exporters.
It gave a mixed report on what it expected from U.S. president-elect Donald Trump, saying the kind of infrastructure spending he promised could boost global growth.
However, it is wary of his anti-trade rhetoric.
"Protectionism and the inevitable trade retaliation would offset much of the positive effects of proposed fiscal initiatives on domestic and global growth," said OECD chief economist Catherine L. Mann.
"It would also likely raise prices, harm living standards and leave countries in a worsened fiscal position. Trade protectionism may shelter some jobs, but it will worsen prospects and lower well-being for many others."