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.
In June and July, the Bank of Canada has increased its policy rate, brining it to 5% based on its judgement that more restrictive monetary policy was needed to restore price stability.
“Following the contraction in real GDP in the second quarter, we project the Canadian economy to stagnate in the second half of this year and growth to remain weak through the first half of 2024,” says PBO Yves Giroux. “We project the unemployment rate to rise to 6% in the middle of next year and to remain elevated through the first half of 2025,” adds Mr. Giroux.
Upward pressure from commodity prices and strong underlying inflation are projected to keep inflation above the 3% upper bound of the control range in the near term. We expect the Bank of Canada to hold the policy interest rate at 5% through the first quarter of 2024.
With inflation on track to return to its 2% target, we expect the Bank to start lowering its policy rate in April 2024. As the economy enters into material excess supply and commodity prices weaken, we project inflation to return to its 2% target by the end of 2024.
The PBO outlook includes new measures announced by the Government in Budget 2023 and through September 15. For fiscal year 2022-23, PBO estimates the budgetary deficit to be $38.7 billion (1.4% of GDP) and the federal debt-to-GDP ratio to be 42.0%.
“Assuming no new measures and existing temporary measures sunset as scheduled, the deficit is projected to increase to $46.5 billion in the current fiscal year, 2023-24, and the federal debt ratio to rise to 42.6% of GDP. Under status quo policy, the deficit is projected to decline over the medium term, falling to $8.2 billion in 2028-29,” says Mr. Giroux.
The PBO report projects that under status quo policy, the federal debt-to-GDP ratio will remain above its 2022-23 level for two years before gradually declining to 37.8% in 2028-29—well 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 Fall Economic Statement, the risks to the PBO baseline economic and fiscal projection are roughly balanced.
“In terms of downside risks, we 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 spending by provincial governments.