PBO projects a return to 2% inflation
The Parliamentary Budget Officer (PBO) has released a forecast indicating that inflation in Canada is expected to stabilize at the Bank of Canada's target rate of 2% by the year's end, while also projecting an increase in the federal deficit due to a sluggish economy.
This projection comes at a crucial time, just as the federal government prepares for its upcoming spring budget and as anticipation grows over the BoC’s potential interest rate reductions.
In its latest economic and fiscal outlook, the PBO predicts a forthcoming cut in interest rates as soon as April, a move slightly ahead of what financial markets have anticipated. The BoC is scheduled to announce its next decision on interest rates this Wednesday, with expectations leaning towards maintaining the current rate of 5%.
The backdrop of high interest rates has seen the Canadian economy strained, with consumer spending decreasing and businesses experiencing a slowdown in sales. A recent report from Statistics Canada highlighted that the economy achieved a modest growth of 1% on an annualized basis in the fourth quarter caused by a surge in exports fuelled by robust spending in the US.
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However, the PBO's outlook suggests a subdued economic growth of just 0.8% for the current year, slightly below the 1% growth forecasted by the BoC. This tepid growth is expected to impact federal finance, with the PBO estimating the federal deficit to reach $46.8 billion for the current fiscal year, assuming no new fiscal measures are introduced.
This projection surpasses the federal government's previous estimate of a $40 billion deficit.
The report also highlights a risk of a larger deficit and a weaker economy if the BoC decides to maintain higher interest rates for an extended period than currently anticipated.
As finance minister Chrystia Freeland gears up to present the federal budget on April 16, she faces the dual challenge of addressing the fiscal pressures while managing the public's expectations for action on key issues like housing. The budget presents an opportunity for the Liberal government to appeal to Canadians, some of whom have shifted their support to the Conservatives.
Freeland has emphasized the government's commitment to fiscal responsibility, stating, "For our government, it is very, very important to invest in Canada and Canadians… and to do so in a fiscally responsible way. We laid out in the fall economic statement some fiscal guideposts, and we will meet them." This commitment comes in the context of the government's pledge to limit the current fiscal year's deficit to no more than the projected $40 billion.
With the federal deficit reported at $23.6 billion by the end of December, the government also aims to reduce the debt-to-GDP ratio by the 2024-2025 fiscal year compared to last fall's projections and to maintain deficits below 1% of GDP starting in 2026-2027.
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