Canadian Economy to Remain Sluggish Through 2024: Parliamentary Budget Officer

Parliamentary Budget Officer Yves Giroux waits to appear before the Commons Finance committee on Parliament Hill in Ottawa on March 10, 2020. The Canadian Press/Adrian Wyld

The Parliamentary Budget Officer (PBO) is forecasting a growth in the deficit and inflation to fall to 2 percent amid a weak economy in 2024.

The PBO outlined its predictions on the Canadian economy in a March 5 report.

Key expectations include a sub-1 percent GDP for 2024 and slight rise in unemployment, which will then slowly decline. Inflation is predicted to fall, with the Bank of Canada (BoC) interest rate following suit.

Federal debt will rise along with the yearly deficit in 2024, but so will annual revenues.

These figures precede a Bank of Canada interest rate announcement on March 6 and the release of the 2024 federal budget next month.

The PBO’s economic outlook sees real GDP dropping to 0.8 percent for 2024, slightly lower than the 2023 level, which the PBO puts at 1.1 percent. The GDP is expected to rebound to 2.4 percent in 2025, then fall slightly to 2.1 percent for 2026–28.

The PBO says the unemployment rate, measured at 5.7 percent in January, “remains elevated,” despite a decline in labour-force participation. It predicts an overall unemployment rate of 5.9 percent for 2024, dropping to 5.5 percent in 2026–28.

Overall, 2024 inflation is estimated to be 2.4 percent, down from 2023’s 3.9 percent. Meanwhile, 2025–2028 is projected to see a 1.9 percent inflation rate.

The budget officer predicts the Bank of Canada’s interest rate will fall from its current 5 percent to 3.5 percent during 2024. By 2025 and onwards, it is slotted to be 2.5 percent.

BoC Governor Tiff Macklem recently admitted “forecasting errors” were made when dealing with Canada’s recent high inflation numbers. Overall inflation in 2022 hit a high of 6.8 percent.

However, forecasters now widely expect the central bank to maintain its key interest rate at 5 percent on March 6, anticipating the first rate cut to occur around June.

While inflation falls, the deficit is set to rise temporarily. The PBO projects an increase in the budgetary deficit from $35.3 billion (1.3 percent of GDP) in 2022–23 to $46.8 billion (1.6 percent of GDP) in 2023–24. Yearly deficits are then expected to make a downward trajectory to 0.5 of GDP in 2028.

The PBO projects an increase in the federal debt-to-GDP ratio from 41.7 percent in 2022–23 to 42.4 percent in 2023–24 and 42.5 percent in 2024–25.

The PBO anticipates the federal debt ratio will decrease to 39.2 percent by 2028–29, under the assumption of no new measures and the sunsetting of existing temporary measures as scheduled. This is still “well above” the pre-pandemic level of 31.2 percent of GDP in 2019–20.

In terms of risks and uncertainty, the PBO identifies the potential downside risk of the BoC’s “restrictive monetary policy” negatively affecting the economy. On the bright side, higher-than-expected export growth may occur contingent on the strength of the U.S. economy.

All of these figures presuppose stability in projected federal spending. Finance Minister Chrystia Freeland will unveil the Liberal government’s federal budget on April 16.

Ms. Freeland has reaffirmed her dedication to the new fiscal guardrails set in the fall, designed to limit deficits. Additionally, the federal government has committed to ensuring that the deficit for the current fiscal year does not exceed the projections made in the fall.

Opposition Leader Pierre Poilievre has vowed to “cap government spending and cut government waste” to balance the budget and reduce inflation and interest rates if his party wins the next election.

Mr. Poilievre has attributed the blame to Prime Minister Justin Trudeau, criticizing his eight years in office for leading to the highest inflation in 40 years and a significant increase in interest rates, which he directly links to Trudeau’s deficit spending.

The prime minister in January dismissed appeals to curtail spending, arguing instead that “strong countries ... invest in themselves and their people.”

Mr. Trudeau has emphasized that his priority “needs to be and will continue to be on how we’re there to support Canadians in a challenging time, and how we create greater growth and opportunities for them in the years to come.”