Inflation will chart Canada’s economic fate, Ottawa’s fiscal update shows – National | Globalnews.ca

Canada is ready to weather the harsh winter winds cooling the global economy, despite being set for “significantly weaker growth,” according to the government’s fall economic statement on Thursday.

The update from Chrystia Freeland, the Liberal finance minister and deputy prime minister, keeps the government’s fiscal “powder dry,” reserving major spending items for the next federal budget in the spring. But it contains a few targeted measures such as boosts for low-wage workers and student loan interest relief to support Canadians struggling with inflation and interest rates.

It is that very risk of stubborn and prolonged inflation — and the monetary tightening needed to stamp it out — that informs Ottawa’s fiscal path.

Many of the government’s projections are based on surveys of private sector economists conducted in September 2022. The update makes clear that since that time, economic growth prospects have worsened across the globe.

Freeland focused on “uncertain times” in the global economy, driven by Russia’s invasion of Ukraine and “aftershocks” from the COVID-19 pandemic in the update. She pointed to these external factors as driving economies around the world into decline and said Canada will not be immune.

“Canada cannot avoid the global slowdown to come, any more than we could have prevented COVID from reaching our shores once it had begun to infect the world,” the document reads.

The federal government did not state outright in its projections whether it believes Canada will fall into a recession, even as the chorus of voices predicting such a downturn grows louder.

The consensus of economists polled back in September projected “significantly weaker growth” than predicted in Ottawa’s budget this past spring. The new baseline forecast sees overall gross domestic product (GDP) growth of “just above zero for the next several quarters” and unemployment rising to 6.3 per cent by the end of 2023.

That projection also puts the odds of a recession in Canada at 40 per cent. But Ottawa’s update also provides a “downside scenario” outlining a worse case amid economic uncertainty.

Whether Canada ultimately falls into a recession next year rides largely on the stubbornness of inflation, according to government projections in the fiscal update, which forecasts inflation remaining above target levels for “some time.” The longer it takes for inflation to return to the Bank of Canada’s two per cent target, the higher interest rates will need to rise in turn, it said.

The most recent readings from Statistics Canada show headline inflation slowed to 6.9 per cent in September, down from a high of 8.1 per cent in June. Core inflation metrics that the central bank watches to gauge its rate hikes have held steady, however.

The Bank of Canada made clear at its most recent interest rate hike last week that its policy rate would need to rise further, but hinted the days of outsized increases may be coming to an end.

Canada will fall into a “mild recession” in the first quarter of 2023 if inflation remains above three per cent through to the first quarter of 2024, and if interest rates hit 4.5 per cent in the short-term, per the feds’ downside projections.

The Bank of Canada’s own forecasts see inflation dropping to three per cent by the end of next year and back to two per cent by the end of 2024.

In the recession scenario, Canada’s real GDP contracts 1.6 per cent from peak to trough and unemployment hits 6.9 per cent.

The document also cites a risk that if Canada’s housing market proves more sensitive to interest rate hikes than first thought, a “sharper correction” is in the cards. Home prices in Canada have already fallen an average of nine per cent from February’s peak, according to federal data, as higher interest rates cool the market.

Sahir Khan, executive vice-president of the Institute of Fiscal Studies and Democracy at the University of Ottawa, gives credit to the government for providing a “transparent” look at what the ramifications of a possible recession would be.

In an interview with Global News on Thursday he said while these projections aren’t “great,” they’re not “dire,” either.

Freeland, speaking to reporters before the release of the fiscal update on Thursday, said Canadians should “take comfort” in the downside scenario.

“Even if things are significantly worse than private sector economists were thinking when we surveyed them, Canada’s fiscal position is absolutely sound and Canada gets through this in really good shape,” she said.

Freeland claimed in the update that by being “prudent” with its spending today and “keeping (the) powder dry,” Canada’s economy will be well-suited to weather any downturn and to “thrive in a post-COVID global economy.”

“In the months to come, we will be able to invest in the Canadian economy and be there for the
Canadians who need it most,” the document states.

“We have a well-built house with a solid roof, and we have survived far colder winters before.”

Among the new initiatives outlined in the fall economic statement are a tax credit for clean tech projects and a plan to tax share buybacks on large corporations in an effort to encourage companies to invest in their own domestic operations.

Khan said the government’s new spending plans, which he said work out to an additional $6 billion annually, are not enough to make a sizeable dent in Canada’s economy and are therefore unlikely to contribute to inflationary pressures.

Asked by reporters whether the government was doing enough for Canadians struggling to get by, Freeland said she was “confident” the spending plan will provide enough support without inadvertently driving inflation.

“What we’re announcing today is to strike a balance between necessary compassion and support for Canadians and fiscal responsibility,” she said.

With this fiscal update, Khan said the government has accurately diagnosed the global sources of inflation and avoided putting too much homegrown fuel on the fire.

“Much of the cause of inflation in Canada is externally driven. We’re still dealing with supply chain problems because of the war in Ukraine. Elements of domestic demand … are being addressed with the Bank of Canada’s action on interest rates,” he said.

“I think fiscal policies largely align to that.”