What You Need to Know About the Update of Economic and Fiscal Projections

The Canadian Minister of Finance, Bill Morneau, presented the Update of Economic and Fiscal Projections this morning in Ottawa. In two words, the federal government’s economic and fiscal outlook has deteriorated since the previous Government presented the 2015-2016 budget back in April (Budget 2015).

GDP Growth

The private sector consensus expects Canadian real GDP to slow down to 1.2 per cent in 2015 from 2.4 per cent recorded in 2014. Although real GDP is expected to increase by 2.2 per cent in the second half of 2015, this slowdown reflects the contraction in output in the first half of this year (-0.8 per cent in Q1 and -0.5 per cent in Q2). The Canadian real GDP is projected to register a modest growth pace of 2 per cent in 2016. This is came as no surprise given the several downside revisions to Canada's real GDP by the Bank of Canada, the Parliamentary Budget Officer; but also the IMF, the OECD, and other economic institutions.

Deficit

Ottawa also announced a deficit of $3 billion for the 2015-2016 fiscal year and $3.9 billion in 2016-2017. Indeed, the outlook for GDP inflation has been revised down for the second half of 2015 and 2016 as a result of smaller increase in global crude oil prices than anticipated at the time of Budget 2015. Consequently, nominal GDP has been lowered $15 billion in 2015 and by $32 billion per year, on average, over the 2016 to 2019 period, compared to the outlook in Budget 2015 presented by the Conservatives.

Tax receipts are driven more by changes in the nominal GDP, hence, the federal government’s tax revenues are being dragged down by lower than expected nominal GDP. At the same time, expenses are being driven up by a surge in Employment Insurance claims (for example in Alberta) and charges related to the cost of employee benefits as a result of lower interest rates. These developments have reduced the projected budgetary balance by $6 billion per year, on average, relative to Budget 2015.

Note

It is important to point out that these projections do not include any measures adopted by the current government nor do they include any of the economic and fiscal benefits arising from the Liberals’ electoral promises. Accounting for these benefits, the budget deficit could go up to $10 billion next year.

Outlook

Several factors will continue to support Canadian economic growth over the next few quarters, including the improving U.S. economy, the ongoing impact of accommodative monetary policy and a lower value of the dollar. Nonetheless, downside risks persist, primarily reflecting low and volatile crude oil prices and a weak and uncertain global environment (cooling Chinese economy, deflationary headwinds in Europe, and recession in Japan).

What You Should Be Looking For

In the coming weeks, I believe two developments would be interesting to follow up closely. The first one being whether the Liberal government will opt for a stimulus plan and in what way: the same fiscal investments promised during the campaign or a larger stimulus plan? And the second one is what the reaction of the Bank of Canada will be during the next interest rate announcement on December 2nd. I will look forward to these two!

Comments are welcome. I also tweet @rami_kiwan.