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“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

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