Economic and Fiscal Outlook – October 2022
This report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings.
Highlights
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Since the beginning of March, the Bank of Canada has increased its policy rate by a total of 300 basis points. We expect the Bank to increase its policy rate further, reaching 4 per cent by the end of this year. With the tightening of monetary policy, PBO projects real GDP growth in Canada to slow considerably in the second half of 2022 and remain weak through 2023.
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As supply constraints ease and commodity prices recede from elevated levels in the first half of 2022, softer demand in 2023 is expected to contribute to sustained reductions in CPI inflation. With CPI inflation solidly on track to return to its 2 per cent target, we expect the Bank of Canada to start lowering its policy interest rate in late 2023.
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In the absence of final financial results for the past fiscal year, PBO estimates that there was a budgetary deficit of $97.0 billion (3.9 per cent of GDP) in 2021-22. For the current fiscal year 2022-23, PBO projects the deficit to decline to $25.8 billion (0.9 per cent of GDP) under status quo policy.
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Assuming no new measures are introduced and existing temporary measures sunset as scheduled, the budgetary deficit is projected to decline further, reaching $3.1 billion (0.1 per cent of GDP) in 2027-28, as growth in tax revenue tracks gains in nominal GDP and growth in program spending remains constrained.
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PBO projects the federal debt-to-GDP ratio to continue to decline from its peak in 2020-21, gradually reaching 36.2 per cent in 2027-28, but remain above its pre-pandemic level. We project the debt service ratio (public debt charges relative to tax revenues) will peak at 11.5 per cent in 2024-25 and then decline gradually, reaching 10.9 per cent in 2027-28.
Communications
Quotes
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Following a strong performance in the first half, with the tightening of monetary policy, we expect growth in the Canadian economy to slow considerably in the second half of 2022 as consumer spending downshifts and residential investment continues to decline. We project real GDP growth to remain weak through 2023 before rebounding somewhat in 2024.
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With CPI inflation solidly on track to return to its 2% target, we expect the Bank of Canada to lower the policy interest rate to its neutral level of 2.5% by the end of 2024.
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For the current fiscal year 2022-23, we project the deficit to decline to $25.8 billion (0.9% of GDP) under status quo policy and assuming no new measures are introduced and existing temporary measures sunset as scheduled, the deficit is projected to decline further, reaching $3.1 billion (0.1% of GDP) in 2027-28.
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With the synchronized tightening of monetary policy by major central banks around the world to reduce high inflation, there is a risk of a more severe global slowdown, which would negatively affect the Canadian economy and federal finances.
Parliamentary Budget Officer