Chrystia Freeland released her fall economic statement this week. Kevin Page and his colleagues write that she is forecasting a rough road ahead:
There are three overarching strategic messages in the fall statement.
On the economy: global economic uncertainty is high. High inflation must be addressed. The Canadian economy is headed for a slowdown. Inflation is expected to have peaked. We are estimated to be a year away from having inflation rates within the Bank of Canada’s mandated target range (1 to 3 percent).
On policy: in the current high inflation environment, federal spending must be restrained. New measures must be targeted to help vulnerable people address affordability challenges. The transition to a more competitive, greener, more inclusive and resilient economy is ongoing — new measures are required to stimulate investment and growth, particularly in light of the recent US initiatives (i.e., the US Inflation Reduction Act). More will follow.
Finance officials, who crafted the fall statement, are arguing that the updated fiscal plan represents a steady hand in turbulent times. Normalized (small) budgetary deficits and a declining debt-to-GDP ratio will help ensure flexibility to address the impacts of a possible recession and will allow additional public spending in the (low-inflation) future to support growth and job creation.
Prospects for a global slowdown are increasing. High inflation and rising interest rates are expected to slow demand significantly. Prospects for growth have diminished in China (due to COVID) and Europe (due to Russia’s war on Ukraine and energy supply). Finance Canada has developed their own independent downside scenario: The recession starts early in 2023. Growth shrinks on average 0.9 percent in 2023. There is no upside scenario. This is an unusual development (i.e., risks in baseline outlook are not symmetrical) for Finance. The dark clouds are within view.
Buckle your seat belts. This is going to be no vacation cruise.
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