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.
PBO projects growth in the Canadian economy to remain sluggish through 2024, with quarterly real GDP growth hovering around 1% (at annual rates), and the unemployment rate to reach 5.9% in the second half of this year.
“We expect restrictive monetary policy to restrain growth in consumer spending in the first half of the year and to dampen residential investment over the course of this year,” says PBO Yves Giroux. “As excess supply in the economy increases and commodity prices continue to weaken, we project that CPI inflation will return to its 2% target by the end of 2024,” adds Mr. Giroux.
PBO projects annual real GDP growth in 2025 to rebound to 2.4% as consumer spending surges and the drag from inventory investment dissipates. Over 2026 to 2028, PBO projects real GDP growth to average 2.1%, which is higher than our estimated growth in potential output over the same period.
The PBO outlook includes new measures announced by the Government in its 2023 Fall Economic Statement and through February 1. For the current fiscal year, 2023-24, PBO projects the budgetary deficit to be $46.8 billion (1.6% of GDP) and the federal debt-to-GDP ratio to rise to 42.4% under status quo policy.
“Excluding potential measures that could be included in the upcoming Budget and assuming existing temporary measures sunset as scheduled, the deficit is projected to decrease to $40.8 billion in 2024-25 while the federal debt-to-GDP ratio edges higher to 42.5%. Under status quo policy, the deficit is projected to decline over the medium term, falling to $16.9 billion (0.5% of GDP) in 2028-29,” says Yves Giroux, PBO.
Compared to PBO’s October outlook, projected budgetary deficits are $7.9 billion higher, on average, over 2023-24 to 2028-29. This increase is largely due to upward revisions to the status quo outlook for direct program expenses and major transfers to persons.
The PBO report highlights risks and uncertainty surrounding the outlook. Setting aside new measures that are likely to be announced in the Government’s 2024 budget, the risks to the PBO baseline economic and fiscal projection are roughly balanced.
“In terms of downside risks, we continue to judge that the most important risk is a larger-than-expected impact on the Canadian economy, including housing, from the Bank of Canada’s restrictive monetary policy, which would negatively affect the Canadian economy and federal finances,” adds Mr. Giroux. “In terms of upside risks, we judge that the most important risk is higher-than-projected growth in exports if U.S. real GDP growth does not slow as quickly as anticipated“.