The Executive Directors found that Canada's strong economic performance of the past decade continued in 2007. Real GDP growth was around 2.5% in 2007, driven by robust growth in domestic demand - particularly private consumption and residential investment — of close to 4%. Domestic demand was boosted by large terms-of-trade gains and by improvement in employment, as the unemployment rate fell below 6% to its lowest level in 33 years.

Growth slowed toward the end of the year, and is expected to decelerate further to 1.8% in 2008, reflecting a sharp downturn in the United States, past currency appreciation, and a tightening of financial market conditions. Core inflation, which had been on the rise earlier in the year, declined in the second half of 2007, owing to stronger-than-expected exchange rate pass-through, although the headline rate remained elevated due to rising gasoline prices.

Despite strong gains in the terms of trade, the external current account surplus narrowed to 1% of GDP in 2007, as real net exports declined sharply, the IMF revealed.

The latter largely reflected a sharp deterioration in the manufacturing trade balance in response to the currency appreciation and the slowing US economy, but also increasing imports.

Financial conditions have been modestly affected by the spillovers from the global liquidity crunch in the money markets. Interbank spreads for major Canadian banks rose, although not as much as in other major markets. The extent of financial vulnerabilities has so far been limited, the IMF explained, owing to relatively low exposures to asset-backed securities, but uncertainties remain with respect to the impact of further deterioration in US financial market conditions.

A prudent fiscal policy framework for the last decade has provided for 10 consecutive years of budget surpluses, and public debt ratios have declined. The budget surplus for fiscal year 2006/07 was estimated at 1% of GDP, half a percentage point above the budget forecast, reflecting buoyancy of corporate income tax revenue. In its October 2007 Economic Statement, the government emphasized tax relief (the federal goods and services tax rate was cut by 1 percentage point to 5%, effective January 1, 2008, and the corporate and personal income taxes have also been reduced), and debt reduction to be the key priorities for the use of budget over performance.

The government's structural policy blueprint — Advantage Canada, released in late 2006 — emphasized boosting productivity as a high priority in the structural reform agenda. Key measures identified in the blueprint included: enhancing business productivity by reducing the high marginal effective tax rates (which was supported by the tax relief measures proposed in the Economic Statement), creating a dynamic and globally competitive financial system, and enhancing interprovincial labor mobility.

In a statement, the IMF Board announced that:

"Directors commended the government's objective of lowering the tax burden and continuing debt reduction as highlighted in the 2007 Economic Statement. In particular, they welcomed the authorities' objective to eliminate general government debt by 2021, and agreed that this would help provide the fiscal space needed to meet impending costs related to population aging."

"In light of the relatively high level of Canada's marginal effective corporate tax rates, Directors welcomed the reduction in the general corporate income tax rate in January, and planned further reductions over the medium term."