By Judith Ugwumadu | 3 February 2015

Canada, the largest exporter of oil to the US, has been hit by plunging crude prices that will slow government revenue and curb growth, the International Monetary Fund has said.

Economic growth is expected to continue in Canada this year, however, and become more balanced with a cooling housing market, the fund said on Friday as it cut its growth prediction for this year by 0.1% to 2.3%.

Hamid Faruqee, the IMF’s mission chief to Canada, said: ‘In terms of the challenges for 2015, we forecast growth to edge down slightly. We now see downside risks to those forecasts, given the further drop in oil prices since our forecasts closed, and given the recent data flow.

‘We see growth for the US economy at about 3.5% for 2015. That should provide important support, being Canada’s largest trading partner, and if anything, lower oil prices for the US will be a benefit, a tax cut for consumers.’

The IMF has endorsed the Canada’s commitment to fiscal targets, saying that the government is essentially on track to achieve a balanced budget in 2015. The fund agreed that fiscal consolidation should continue at the general government level, but the composition of the fiscal adjustment would need to shift from the federal government to the provinces.

It welcomed the Bank of Canada's decision – the first in the G7 – to cut interest rates to offset plummeting oil prices, saying the shock would weigh down on the country’s inflation profile and financial stability risks.

However, the IMF encouraged authorities to continue monitoring the impact of monetary policy on household debt and house prices.

It said structural reforms to boost productivity and business investment would also be important to support medium-term growth.