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Economic Developments and Prospects

The world economy is emerging from the deepest and most widespread global recession of the last 60 years. This global downturn continues to have a significant impact on the Canadian economy. The global financial market crisis, together with the large decline in foreign demand, has reduced Canadian exports, reduced employment and weakened business and consumer confidence.

On the whole, Canada has fared much better than most other major advanced economies over the last year. This has occurred despite our strong trade ties with the United States, which has been severely affected by the recession. Canada was the last major advanced country to enter recession. The fall in output in Canada has been among the lowest of all G7 countries since the start of the global recession. While job losses in Canada have been significant, the fall in total employment in the US has been proportionately twice as large (Chart 8). Further, the unemployment rate in Canada is now one percentage point below that in the US—the first time this has occurred in a generation.

In recent months, tentative signs of economic and financial stabilization have emerged. Financial market conditions have improved significantly, in large part due to the extraordinary policy measures introduced by governments and central banks. Following dramatic declines in global economic activity in late 2008 and early 2009, the pace of contraction in economic activity has eased considerably, with some countries posting positive growth in the second quarter of 2009.

Private-sector forecasters surveyed in August continue to expect an economic recovery in Canada beginning in the second half of this year and gaining momentum in 2010 (Chart 9). These expectations are consistent with recent economic developments. Canada’s real GDP increased 1.2 per cent at an annual rate in June, the first monthly increase in 10 months. Consumer confidence, consumer spending, and housing activity in Canada have also continued to improve in recent months.

While prospects for an economic recovery are encouraging, it is not assured. Further, there is considerable uncertainty and debate about the strength of any recovery and medium-term prospects for the global and US economies.

These concerns about the future course of the global economy are at the root of recent downward revisions to private-sector forecasts of the medium-term level of output in Canada. This is reflected in Table 2 below, which presents the average of private-sector forecasts as of August 17.

However, differing views on how these issues will be resolved have resulted in a wide range of private-sector forecasts of the Canadian economy. For example, the difference between the average of the three highest and three lowest forecasters in the August survey for nominal GDP in 2013 is about $100 billion (Chart 10). This is the largest divergence of forecasts since the Department of Finance began conducting these surveys and translates into a potential $15 billion variation in the level of annual budgetary revenues.

This uncertainty will likely remain for a considerable time, as the ramifications of the largest global economic shock since the Second World War are revealed and better understood.

Another important element of the economic forecast is commodity prices. Canada is a major net exporter of commodities, and price movements in commodities have a major impact on nominal GDP and government revenues. The average private-sector forecast for nominal GDP is consistent with unchanged commodity prices over the next 5 years. This is somewhat more prudent than suggested by current futures contracts, which suggest significant increases in crude oil and natural gas prices through 2015.

Canadian Economic Outlook, 2009–2014

The Government considers the average of these private-sector economic forecasts to be a prudent basis for fiscal planning.

Private-sector forecasters in the August survey expect nominal GDP in Canada to decline by 4.6 per cent in 2009, compared to an expected decline of 2.7 per cent in Budget 2009 planning assumptions. As a result, the current private-sector forecast for nominal GDP is $33 billion lower than Budget 2009 planning assumptions in 2009 and $76 billion lower by 2014.

In line with the expected sustained economic recovery over the medium term, private-sector forecasters expect a gradual recovery in the labour market. However, given the weaker-than-expected economy in late 2008 and early 2009, private-sector forecasters expect the unemployment rate to average 9 per cent in 2010, 1.3 percentage points higher than anticipated at the time of the budget. The unemployment rate is then expected to gradually fall to 6.5 per cent by 2015.

Private-sector forecasters expect short-term interest rates to remain below those expected at the time of Budget 2009 in the near term. However, they expect short-term interest rates to rise rapidly over the course of 2011 and to average about 4 per cent by 2012, roughly the same level that was expected at the time of Budget 2009. Private-sector forecasters expect long-term interest rates to average 4.7 per cent between 2010 and 2014, virtually unchanged from their average forecast over this period in the budget.

Private-sector forecasters also expect consumer price inflation to rebound from 15-year lows to inflation rates expected in Budget 2009, beginning in 2010. Consumer price inflation is expected to average 2 per cent between 2010 and 2014, identical to the private-sector forecast at the time of Budget 2009.