The Parliamentary Budget Officer (PBO) today released his Economic and Fiscal Outlook. The report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings.
“Following a stronger-than-expected performance in the second half of last year, we project the Canadian economy to effectively stagnate over the course of this year. We anticipate a further decline in residential investment and weakness in consumer spending, as the tightening of monetary policy takes hold,” says PBO Yves Giroux.
As supply constraints ease and commodity prices remain close to current levels, softer demand in 2023 is expected to contribute to sustained reductions in consumer price inflation.
“We expect the Bank of Canada to maintain its “pause” through to the end of this year. With CPI inflation on track to return to its 2% target, we then expect the Bank to start lowering its policy rate early next year,” adds Mr. Giroux.
The PBO outlook includes new measures announced by the Government in its 2022 Fall Economic Statement and the health funding plan announced on February 7. For the current fiscal year, 2022-23, PBO projects the budgetary deficit to be $36.5 billion (1.3% of GDP) and the federal debt-to-GDP ratio to be 41.8% under status quo policy.
“Assuming no new measures and existing temporary measures sunset as scheduled, the deficit is projected to increase to $43.1 billion in 2023-24 and the federal debt ratio to rise to 42.2% of GDP. Under status quo policy, the deficit is projected to decline over the medium term, falling to $8.7 billion in 2027-28,” says Yves Giroux, PBO.
The PBO report projects that—under status quo policy—the federal debt-to-GDP ratio will resume its downward trajectory, gradually falling to 38.1% in 2027-28, but remain above its pre-pandemic level of 31.2% of GDP in 2019-20.
The PBO report highlights risks and uncertainty surrounding the outlook. Setting aside new measures that are likely to be announced in the Government’s 2023 budget, the risks to the PBO baseline economic and fiscal projection are roughly balanced.
“We judge that the most important downside risk is a severe global economic slowdown (for example, due to an escalation of the war in Ukraine and or excessive monetary policy tightening by major central banks), which would negatively affect the Canadian economy and federal finances,” adds Mr. Giroux.
In terms of upside risks, high levels of household savings coupled with a resilient labour market could fuel consumer spending above levels projected in the PBO baseline outlook.