CANADA'S ECONOMIC PROSPECTS ARE GETTING WORSE NOT BETTER
The International Monetary Fund (IMF) has just lowered its forecast of economic growth for Canada to 1.0% for 2015 and to 1.7% for 2016. In their July 2015 update, the IMF had forecast growth of 2.0% for 2015 and 2.1% for 2016. This is a major downward adjustment and corresponds to a further reduction for global economic growth to its lowest level since 2009. It will mean that the Canadian economy will continue to operate below its economic potential, a trend that began in 2009. Among the G-7 countries, only Italy and Japan are expected to have lower growth prospects for 2015. In the April 2015 Budget, the Minister of Finance forecast real GDP growth of 2.0% for 2015 and 2.2% for 2016.
In comparison to the April 2015 Budget, the revised IMF forecast will result in a deterioration in the budgetary balance of just over $4 billion in 2015-16 and just under $7 billion in 2016-17, wiping out the planned surpluses for those years. There could be some offset through the impact of lower interest rates and the use of the “risk adjustment factor”, set at $1 billion in each of these two years.
The current IMF forecast puts them in the company of most private sector economists who have also lowered their forecast for 2015 to around 1%. Although the IMF is somewhat more pessimistic about the growth prospects for 2016, private sector forecasters will likely follow the IMF.
Even more troubling, the IMF cautions that the risks to the forecast are all on the downside. This includes the possibility of lower oil prices – their forecast for oil prices continues to be relatively positive - slower-than-expected growth in the EURO zone and in emerging economies, especially in China.
The IMF also encourages countries (e.g., Canada) with a sustainable fiscal structure – low and declining debt-to-GDP ratios – to undertake stimulus fiscal actions to bolster domestic demand. They argue “countries with fiscal space and sizeable output gaps or significant reliance on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure spending”. Such investment would provide much-needed support to domestic demand.
Normally, the Department of Finance would issue a press release exploiting the positive messages in the IMF report. Not surprisingly Mr. Oliver is nowhere to be seen.