(OTTAWA) The Parliamentary Budget Officer forecasts a sharp slowdown in Canada’s real GDP growth in the second half of 2022, and “weak growth” throughout 2023, as the Bank of Canada continues to raise interest rates.
Posted at 1:15 p.m.
In its most recent economic and financial outlook, Yves Giroux’s office expects the Bank of Canada to raise its key rate to 4% by the end of this year, a measure in line with financial market expectations.
Economists expect the economy to slow as higher interest rates cause individuals and businesses to cut spending.
Since last March, the Bank of Canada, to fight against inflation, has gradually raised its key rate, which rose from 0.25% to 3.25%. The annual inflation rate in Canada was 7.0% in August.
The housing market has already begun to soften in response to these interest rate increases, but the full effect of the increases announced by the central bank will take longer to be felt in the economy.
The Parliamentary Budget Officer’s (PBO) report also predicts that the unemployment rate will reach 5.8% by the end of 2023, before falling again. This increase will be mitigated by the steady decline in the labor force participation rate as more and more Canadians retire.
Statistics Canada’s September jobs report showed the job market was still tight, with an unemployment rate of 5.2%.
Falling deficits
As inflation slows and heads towards the central bank’s 2% target, the Parliamentary Budget Officer expects the Bank of Canada to begin lowering interest rates towards the end of 2023, to reduce its key rate to 2.5% by the end of 2024.
The Parliamentary Budget Officer (PBO) also estimates that the federal deficit will decrease to $25.8 billion, or 0.9% of GDP, for the 2022-2023 fiscal year. The deficit was 97 billion, or 3.9% of GDP, in the previous fiscal year.
Assuming no new measures are introduced and the current temporary measures end as scheduled, PBO estimates the deficit will decline further thereafter, to $3.1 billion, or 0.1% of GDP, of here 2027-2028.
PBO also projects that the federal debt-to-GDP ratio will decline from its 2020-21 peak, gradually returning to 36.2% in 2027-28, but will remain higher than before. the pandemic.
However, the PBO points out that the uncertainty surrounding its projections is high. He points to various risks to his forecast, including tighter monetary policy that would lead to a more severe economic slowdown, inflation that would last longer than expected, and higher fiscal spending.
“If the major central banks tighten their monetary policy excessively, this could lead to a more marked global slowdown, which would be detrimental to the Canadian economy and to federal finances,” explains Mr. Giroux.