Nahornick, Nora; Nicol, Caroline; Stanton, Jason; Behrend, Robert; Creighton, Mark; Kpekou Tossou, Rolande; Laurin, Marianne; Michalyshyn, Katarina; Vanderwees, Kaitlyn

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Risk Scenario Analysis — November 2022

PDF

Nora Nahornick; Caroline Nicol; Jason Stanton; Robert Behrend; Mark Creighton; Rolande Kpekou Tossou; Marianne Laurin; Katarina Michalyshyn; Kaitlyn Vanderwees

Published on November 10, 2022 PDF

This report provides a risk scenario analysis to help parliamentarians gauge potential economic and fiscal implications of central banks over-tightening monetary policy. The scenario is not a most-likely forecast. It is an illustrative scenario of one possible outcome.

Highlights

Our risk scenario assumes that the U.S. Federal Reserve and the Bank of Canada will continue to rapidly raise their policy interest rates to 5.25 per cent and 5.0 per cent, respectively, in early 2023 (100 basis points above our October outlook). We assume that the Federal Reserve and Bank of Canada will begin to lower their policy rates in early 2024.
With the over-tightening of monetary policy, real GDP in Canada begins to contract in the fourth quarter of 2022 and declines further over the course of 2023 in our risk scenario. Annual real GDP growth in 2023 and 2024 is -0.3 per cent and 1.3 per cent, respectively, which is 1.5 and 1.0 percentage points lower compared to our October outlook.
Under our risk scenario, employment growth essentially stalls in late 2022 and over the course of 2023. Employment falls below levels projected in our October outlook, resulting in a loss of 177,000 (net) jobs by the end of 2024. The unemployment rate rises to 6.2 per cent in early 2024 in our risk scenario, which is 0.5 percentage points above our October outlook.
Due to weaker economic activity and higher interest rates in 2023 and 2024 under our risk scenario, the budgetary deficit reaches $42.9 billion in 2023-24 (1.5 per cent of GDP) and $36.5 billion in 2024-25 (1.3 per cent of GDP). Compared to our October outlook, the budgetary deficit is $15.6 billion higher per year, on average, over 2023-24 to 2027-28.
Under our risk scenario, the federal debt-to-GDP ratio increases to 43.2 per cent of GDP in 2023-24 and remains elevated before gradually falling to 39.2 per cent in 2027-28. The debt service ratio (that is public debt charges relative to tax revenues) reaches 14.3 per cent in 2024-25 and then declines to 12.0 per cent in 2027-28.

Communications

Quote

The risk scenario in today’s report is one of many possible outcomes. I would stress that the scenario is not a most-likely forecast—it’s an illustrative scenario of one possible outcome. Policymakers and international institutions have expressed concerns about monetary policy over-tightening and today’s report outlines some potential economic and fiscal impacts.

Yves Giroux
Parliamentary Budget Officer

News Release

{"id":42,"created_at":"2022-11-10T08:58:10-05:00","updated_at":"2022-11-10T09:05:17-05:00","slug":"pbo-releases-risk-scenario-analysis-le-dpb-publie-une-analyse-de-scenario-de-risque","title_en":"PBO Releases Risk Scenario Analysis","title_fr":"Le DPB publie une analyse de sc\u00e9nario de risque","body_en":"The Parliamentary Budget Officer (PBO) today released a Risk Scenario Analysis \u2014 November 2022 to help parliamentarians gauge potential economic and fiscal implications in the event of central banks over-tightening monetary policy. This risk was flagged in the PBO\u2019s Economic and Fiscal Outlook \u2013 October 2022.\n\n\u201cThe risk scenario in today\u2019s report is one of many possible outcomes. I would stress that the scenario is not a most-likely forecast\u2014it\u2019s an illustrative scenario of one possible outcome,\u201d said Yves Giroux, PBO. \u201cPolicymakers and international institutions have expressed concerns about monetary policy over-tightening and today\u2019s report outlines some potential economic and fiscal impacts.\u201d\n\nThe risk scenario analysis does not incorporate any new economic data released after September 30 or any fiscal measures incremental to the October Economic and Fiscal Outlook, such as measures included in the Government\u2019s 2022 Fall Economic Statement.","body_fr":"Le directeur parlementaire du budget (DPB) a publi\u00e9 aujourd\u2019hui son Analyse de sc\u00e9nario de risque \u2014 Novembre 2022 pour aider les parlementaires \u00e0 \u00e9valuer les r\u00e9percussions \u00e9conomiques et financi\u00e8res dans l\u2019\u00e9ventualit\u00e9 d\u2019un resserrement excessif de la politique mon\u00e9taire par les banques centrales. Ce risque a \u00e9t\u00e9 soulign\u00e9 dans les Perspectives \u00e9conomiques et financi\u00e8res \u2013 Octobre 2022 du DPB.\n\n\u00ab Le sc\u00e9nario dans le rapport d\u2019aujourd\u2019hui n\u2019est qu\u2019un parmi tant d\u2019autres. J\u2019insiste sur le fait qu\u2019il ne constitue pas une pr\u00e9vision \u2013 il ne montre qu\u2019une des issues possibles \u00e0 la situation \u00bb, a indiqu\u00e9 Yves Giroux, DPB. \u00ab Les d\u00e9cideurs et les institutions internationales ont exprim\u00e9 leurs inqui\u00e9tudes quant \u00e0 un resserrement excessif de la politique mon\u00e9taire et le rapport d\u2019aujourd\u2019hui en \u00e9value certains cons\u00e9quences \u00e9conomiques et budg\u00e9taires potentiels. \u00bb\n\nL\u2019analyse de sc\u00e9nario de risque ne tient compte d\u2019aucune nouvelle donn\u00e9e \u00e9conomique publi\u00e9e apr\u00e8s le 30 septembre ni d\u2019aucune mesure financi\u00e8re prise apr\u00e8s la publication des Perspectives \u00e9conomiques et financi\u00e8res en octobre, comme les mesures incluses dans l\u2019\u00c9nonc\u00e9 \u00e9conomique de l\u2019automne de 2022 du gouvernement.","release_date":"2022-11-10T09:00:00-05:00","is_published":"2022-11-10T09:02:25-05:00","internal_id":"COM-2223-042","permalinks":{"en":{"website":"https:\/\/www.pbo-dpb.ca\/en\/blog\/news-releases--communiques-de-presse\/pbo-releases-risk-scenario-analysis-le-dpb-publie-une-analyse-de-scenario-de-risque"},"fr":{"website":"https:\/\/www.pbo-dpb.ca\/fr\/blog\/news-releases--communiques-de-presse\/pbo-releases-risk-scenario-analysis-le-dpb-publie-une-analyse-de-scenario-de-risque"}},"pivot":{"publication_id":716,"news_release_id":42}}

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