Almost every budget process is an exercise in optimism. The federal government hopes to rein in program spending. I hope that the world economy will move in a better direction. Most of all, I hope things don’t get worse.
In a world full of uncertainty, that can be a risky gamble.
“The only risks are to the downside,” said Kevin Page, director of the Institute for Fiscal Studies and Democracy at the University of Ottawa.
The Fall Economic Report (FES) is based on economic forecasts from multiple economists across the country.
These forecasts show real GDP growth slowing to about 0.3% this year, but suggest Canada will avoid a recession. The statement said inflation is expected to average 3.8% this year and 2.5% next year, while unemployment is expected to peak at about 6.4% in 2024.
That weakness is being felt across the country as prices and interest rates rise and the economy slows.
Finance Minister Chrystia Freeland knows all too well how stretched Canadian families are feeling right now.
featured videos“In humble terms, I have real confidence in Canada,” Finance Minister Chrystia Freeland said in an interview with Power and Politics. “This is a difficult world, but no country in the world is better positioned to navigate this uncertainty than ours.”
“Canadians are exhausted, frustrated and feeling oppressed,” he said in a speech to parliament. “What Canadians deserve today is to address the real pain felt by so many with hope and a viable vision for our country’s future.”
But all this uncertainty weighs on the economy. Economic indicators have consistently surprised economists over the years.
So what happens if the Fed’s predictions are wrong?
FES presents what it calls a “downside scenario.” This shows what could happen if the economy deteriorates in the coming months and years.
The downside scenario included in the economic statement predicts a “moderate recession”.
Under that scenario, inflation would remain “stagnant” at around 3% until next fall. If the Bank of Canada raises interest rates another quarter of a point, GDP would fall by 1.7% and the unemployment rate would rise to 7.1%.
Given the economic fluctuations of the past three years, that “downside scenario” is not entirely far-fetched.
“Consumption is weaker in real terms, housing investment is weaker in real terms. Even manufacturing is weak. This is just weakness,” Page said.
The question is not just what a possible recession would look like.
If the economy slows more than expected, it will have an immediate impact on other government figures. The economic report said the budget deficit under the downside scenario would increase by about $8.5 billion a year on average over the plan period.
Slower economic growth leads to lower tax revenues.
“Overall, revenues (will) decline by $2.8 billion per year on average. The expected increases in CPI inflation and interest rates will “fees (an average increase of approximately $5.5 billion)” leading to increased costs and increased public debt (increased by approximately $5.5 billion on average),” the economic statement said.
That downside scenario hinges on whether inflation stalls and the Bank of Canada is forced to the sidelines.
According to this week’s CPI statistics, the year-on-year inflation rate fell to 3.1% in October. However, most of this was due to lower gasoline prices.
And economists point to continued inflation in the service sector as a cause for concern.
The services basket is made up of components that continue to maintain high levels despite slowing headline rates. Rent, travel, and recreation costs are all significantly higher than their peaks.
“Given this pace of services inflation and its persistence, we’d better hope that goods inflation doesn’t flare up again,” said Derek Holt, head of capital markets economics at the Bank of Nova Scotia.
As the economy has weakened this year, so has the government’s fiscal resilience.
According to the fall economic report, public debt costs this year are $46.5 billion, rising to $52.4 billion in 2024. That’s about the same amount the government will pay for the Canada Health Transfer next year.
And that assumes interest rates don’t rise any further. That’s never a safe bet.
