Archived - Update of Economic and Fiscal Projections — 2013: Part 2 of 4
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Economic Developments and Prospects
Almost five years after the end of the global recession, the external economic environment remains fragile. The outlook for global economic growth has weakened somewhat since Budget 2013, primarily due to weaker-than-expected growth in emerging economies. Growth in advanced economies has shown signs of stabilizing, but at a relatively modest pace. In the U.S., elevated uncertainty regarding fiscal policy, along with fiscal measures to reduce the deficit, continue to weigh on growth prospects. While overall growth in the euro area has returned to positive territory, striking disparities remain among member nations, and the region continues to face record-high unemployment and tight financial market conditions.
Despite this external weakness, the Canadian economy has continued to expand, albeit at a modest pace, enjoying the best performance among Group of Seven (G-7) countries over the recovery. Since the end of the global recession, over 1 million new jobs have been created in Canada, with economic growth driven by solid private domestic demand.
However, Canada is not immune to external developments. Canada’s domestic economy has been restrained by weak exports, reflecting the slow global recovery and the economic challenges faced by some of our largest trading partners. More recently, ongoing uncertainty in the global economy has also begun to weigh on domestic business investment. As a result, the private sector forecast for real gross domestic product (GDP) continues to point to modest growth ahead.
Weaker-than-expected global growth since Budget 2013 has also translated into continued softness in the prices of some of Canada’s export commodities. In addition, the ongoing modest pace of Canadian growth has resulted in continued low domestic price inflation. Together, these factors have weighed on economy-wide prices, restraining the growth of nominal GDP, which is the broadest single measure of the tax base.
This chapter reviews major global and Canadian economic developments since Budget 2013, presents the September 2013 average private sector economic forecast that forms the basis for the fiscal projections presented in this Update, and discusses the risks and uncertainties surrounding this economic forecast.
Global Economic Developments and Outlook
Global growth has been weaker than expected at the time of Budget 2013. Growth in advanced economies has stabilized at a relatively slow pace, while growth in emerging economies has decelerated markedly. As a result, the International Monetary Fund (IMF) has revised down its global growth forecast for 2013, particularly for emerging economies (Chart 2.1).
In Europe, the euro area posted real GDP growth of 1.1 per cent in the second quarter of 2013 following a year-and-a-half-long recession. Recent economic indicators suggest the euro area will again see positive, albeit very slow, growth in the third quarter (Chart 2.2). However, striking disparities remain within the region, as Germany and France grew at a solid pace in the second quarter, while recessions continued in Italy, Spain, Greece and the Netherlands. As well, the region continues to face record-high unemployment and financial conditions remain tight, as banks continue to tighten lending standards and interest rates for private borrowers remain elevated in the peripheral countries, such as Spain, Portugal and Greece. The IMF forecasts a contraction of 0.4 per cent in 2013, followed by growth of 1.0 per cent in 2014.
Growth in the euro area remains constrained by restrictive lending to the private sector, especially in peripheral nations. The European Central Bank (ECB) has taken some additional steps to boost growth, cutting its policy rate in May and again in November, bringing the benchmark rate to a record low of 0.25 per cent. In addition, the ECB signalled in July that it will keep its policy rate at low levels for “an extended period of time.” European authorities have also made some progress on the initial stage of a banking union. However, more needs to be done, as the banking system remains fragile and overleveraged. Peripheral countries have also made strides in reducing their fiscal deficits, but further progress is needed to bring sovereign debt down to sustainable levels.
In the United States, economic growth continues to improve. Growth in the third quarter was 2.8 per cent, up slightly from its second-quarter pace and well above the 1.1 per cent posted in the first quarter, in spite of rising long-term interest rates and renewed uncertainty over U.S. fiscal policy. Private demand in the U.S. appears to be holding up, including the continued recovery in the housing market.
At the beginning of 2013, an agreement to avert most of the “fiscal cliff” (a combination of spending reductions and tax increases) reduced fiscal policy uncertainty. However, uncertainty persists, and over the course of the summer Congress failed to agree on renewed spending authority for the federal government. The expiry of government spending authority on September 30 resulted in a shutdown of non-essential federal government operations from October 1 to October 16. More significantly, the U.S. government nearly reached its debt limit, at which point it would have been unable to borrow additional funds, raising the spectre of a government debt default. The impasse ended after an agreement was reached to extend government funding to January 15, 2014 and lift the federal debt limit until February 7, 2014, allowing time for a broader discussion of fiscal reforms.
The partial shutdown of the federal government is expected to have only a minor impact on fourth-quarter real GDP growth. Overall, U.S. private sector economists estimate that the shutdown reduced real GDP growth in the fourth quarter by between 0.2 and 0.6 percentage points. The main channel through which the two-week shutdown will affect real GDP will be the loss of hours worked by public servants. However, some of these lost hours will likely be made up through overtime work, mitigating the impact on real GDP. More importantly, all furloughed federal employees will receive back pay for the days they did not work. As a result, they are likely to have simply postponed purchases of goods and services (particularly bigger ticket items) during the shutdown period, rather than cutting them altogether. Beyond this direct impact, uncertainty in the lead-up to the resolution of the shutdown and extension of the debt limit may have also had a negative impact on confidence, resulting in a small reduction in private sector spending and investment. This suggests that while estimates may show a negative impact on real GDP due to lost hours worked in the government sector, there should be only a modest negative impact on the U.S. private economy as a result of the shutdown.
Notwithstanding the outcome of future spending and debt limit negotiations, already-announced deficit reduction measures (including spending reductions and tax increases) are expected to be smaller in 2014 than in 2013. This lessening in deficit reduction measures should help to support a pick-up in economic growth next year, as long as the tax increases implemented in 2013 do not continue to weigh on economic activity in 2014.
Growth will also be supported by monetary policy, which is expected to remain highly accommodative over the medium term, as the Federal Reserve has committed to keep short-term interest rates close to zero at least until the unemployment rate falls to 6.5 per cent, which financial markets expect to occur in 2015. The Fed has also continued its purchases of U.S. treasury securities and mortgage-backed securities, but signalled this spring that it could start to ease or “taper” the pace of these purchases later in the year, provided the economy improved as projected. This announcement led to financial market uncertainty about the exact timing and pace of tapering and has triggered a more general repricing of risk, resulting in an increase in the level and volatility of U.S. long-term interest rates.
For 2013 as a whole, growth in the U.S. is expected to be 1.6 per cent, down from the forecast of 1.9 per cent contained in Budget 2013. However, growth is expected to pick up to 2.9 per cent in 2014, driven by continued recovery in the housing market, a pick-up in consumer spending and an easing of fiscal headwinds (Chart 2.3).
In emerging economies, growth has been weaker than expected. This appears to reflect both cyclical slowing and weaker trend growth. The slowdown in growth has highlighted vulnerabilities such as high fiscal and current account deficits. Exacerbating these vulnerabilities has been the recent sharp increase in U.S. long-term interest rates, which, along with a general repricing of risk, has shifted capital back to the U.S., leading to exchange rate depreciation, rising interest rates and falling equity prices in many emerging economies, particularly India, Indonesia, Turkey, South Africa and Brazil. Nevertheless, most analysts see only a small risk of a repeat of the 1997–98 Asian financial crisis, as most of the affected countries have built up currency reserves and introduced greater exchange rate flexibility, while international support mechanisms (such as the IMF) have been strengthened.
In China, real GDP growth picked up to 9.1 per cent in the third quarter of 2013 after slowing in the first half of the year. For the year as a whole, however, the IMF expects growth of 7.6 per cent, easing to 7.3 per cent in 2014. This would represent the weakest annual growth rate since 1999 and is significantly below the average annual growth rate of about 10 per cent recorded over the decade preceding the global recession. To some extent, this growth slowdown has been intentional, as Chinese authorities seek to safeguard financial stability and move the economy to a more balanced and sustainable growth path by shifting China’s growth model toward domestic consumption and away from investment and exports.
Overall, the IMF has revised down its global outlook for both 2013 and 2014 relative to its forecast at the time of Budget 2013. This is due to the fact that while growth in advanced economies has stabilized at low levels, growth in emerging economies has been weaker than anticipated. As a result, global growth in 2013 is now expected to be lower than in 2012, continuing a downward trend in growth observed since 2010.
Nonetheless, in its most recent projection, the IMF expects global growth to pick up modestly in 2014, reflecting in part a stronger U.S. economy, an appreciable reduction in fiscal tightening for most advanced economies and highly accommodative monetary conditions. Overall, the IMF expects world real GDP growth to rise from 2.9 per cent in 2013 to 3.6 per cent in 2014. For advanced economies, the IMF now projects growth of 1.2 per cent in 2013 picking up to 2.0 per cent in 2014. In emerging economies, the pace of economic activity is projected to remain well above that of the advanced economies, but below the elevated levels seen in recent years, with expected growth of 4.5 per cent in 2013 and 5.1 per cent in 2014 (Chart 2.4).
Despite the recent deceleration of growth in emerging economies, it is clear that they will remain the engine of global growth. Along with ongoing uncertainty over the global economic outlook, this underscores the need for Canada to diversify its export markets. In 2012, 75 per cent of Canada’s goods exports were destined for the U.S., down from 82 per cent in 2006. This decline has been mirrored by rising shares of our exports to Europe, emerging Asia and other markets (Chart 2.5). In order to hedge against uncertainty and take advantage of the world’s fastest growing economies, it is clear that Canada will need to continue to develop export markets in regions such as Europe and Asia.
In mid-October, Canada and the European Union (EU) reached an agreement in principle on a comprehensive trade agreement that will significantly boost trade and investment ties, creating jobs and opportunities for Canadians. The Agreement will provide Canada with preferential market access to the EU. As a result, Canada will be one of only a few developed economies to have this access to the world’s two largest markets, the EU and the Unites States, which together represent more than 800 million relatively affluent consumers and almost half of global GDP. Canadian workers in every region of the country stand to benefit significantly from increased access to this lucrative 28‑country market. The elimination of approximately 98 per cent of all EU tariff lines on the first day that the Agreement comes into force will translate into increased profits and market opportunities for Canadian businesses of all sizes, in every part of the country.
Financial Market Developments
Most global equity markets have improved since Budget 2013, reflecting signs that growth prospects have begun to improve in the U.S. and euro area (Chart 2.6). Canadian markets, on the other hand, have risen only modestly, in part reflecting ongoing weakness in many commodity prices.
However, markets have remained volatile, reflecting ongoing uncertainty over U.S. fiscal and monetary policy and persistent structural issues in the euro area. This has triggered a more general repricing of risk, resulting in both higher-than-anticipated and more volatile long-term interest rates in the U.S. As a result, long-term interest rates have increased in other advanced economies, including Canada (Chart 2.7). Together with a reassessment of economic fundamentals, this has contributed to currency depreciation and capital outflows in a number of emerging economies. Overall, global financial conditions have tightened since the time of Budget 2013.
Since Budget 2013, weaker growth in emerging economies has continued to put downward pressure on many global commodity prices. In particular, prices for many base metals declined over much of the late spring and summer on expectations of slowing Chinese economic growth (Chart 2.8).
Global crude oil prices, as measured by the Brent benchmark, have been broadly unchanged since the time of Budget 2013. However, the U.S. West Texas Intermediate (WTI) benchmark price is modestly higher, reflecting unexpected declines in U.S. crude oil inventories, particularly during July and August. This, along with some reduction in crude oil transportation bottlenecks in the U.S., boosted Canadian benchmark prices even further. Indeed, by late July and August, the larger-than-normal discount on Canadian prices relative to the Brent benchmark had largely dissipated. While this discount has subsequently widened somewhat, it remains below the record levels registered in late 2012 (Chart 2.9).
The fluctuations in these crude oil benchmark prices have also been reflected in actual crude oil export and import prices, which can differ from benchmark prices due to changes in the quality of crude oil (for example, the share of lower-valued heavy crude oil) from period to period, as well as differences in prices between the time contracts are signed and crude oil is delivered. From this perspective, despite the narrowing of the gap between Canadian and global oil price benchmarks, a larger-than-normal price differential remains. As shown in Chart 2.10, if export prices for Canadian crude oil had kept pace with those for imported oil since the end of 2010, the value of Canada’s crude oil exports would have been approximately $7.6 billion higher (or 0.5 per cent of nominal GDP), on average, over the period. And, while this impact lessened somewhat in the second and third quarters of 2013, more recent benchmark data point to an increased price differential once again in the fourth quarter.
Going forward, anticipated continued increases in U.S. and Canadian production will mean that Canadian crude oil producers will continue to face prices that are both more volatile and lower than those prevailing globally. This phenomenon will have significant implications for investment and output in the energy sector, with negative impacts on the Canadian economy as a whole, and underscores the need for improved infrastructure to gain access to global markets and reduce Canada’s dependence on the North American market for energy commodities.
Canada’s Recent Economic Performance
Canada has experienced a solid job creation performance since the beginning of the recovery, with over 1 million more Canadians working today than at the time of the trough in employment in July 2009—an increase of 6.3 per cent. Canada has outperformed all other G-7 economies in job creation over this period (Chart 2.11). Solid employment growth lowered the unemployment rate to 6.9 per cent in September and October 2013, its lowest level since December 2008.
Moreover, about 90 per cent of all jobs created over the recovery have been full-time positions, with more than two-thirds in high-wage industries (Chart 2.12). Encouragingly, the private sector has been the main source of job creation since the end of the recession, an essential condition for a sustained recovery and expansion.
The employment situation in Canada contrasts sharply with that of the U.S., where employment remains below pre-recession levels almost five years after the end of the global recession (Chart 2.13). As a result, the Canadian unemployment rate has been below that of the United States since October 2008, a phenomenon not seen on a sustained basis since the mid-1970s. Furthermore, when Canadian unemployment is measured on the same basis as in the U.S., the unemployment rate gap between the two countries increases to 1.3 percentage points, demonstrating the strength of the recovery in Canada.
The stronger performance of the Canadian labour market is also reflected in the long-term unemployment rate (the number of people unemployed for a period of at least 27 weeks as a share of the labour force). Canada’s long-term unemployment rate stood at 1.4 per cent in 2012, below its historical average since 1976 and well below the U.S. level of 3.3 per cent, which remains more than double its average over the same period.
Moreover, the Canadian labour market has maintained a much higher labour force participation rate (the share of the population 15 and over in Canada, and 16 and over in the United States, either working or actively seeking work), which indicates that there are fewer discouraged workers in Canada, as more of the unemployed are seeking work and finding it. In contrast, the U.S. participation rate has declined sharply and now stands at its lowest level in more than 35 years. As a result, the labour force participation rate gap between the two countries has widened to 3.6 percentage points as of October 2013, the largest on record. In the absence of such a marked decline in the U.S. labour force participation rate, the U.S. unemployment rate would have remained near its post-recession level of about 10 per cent.
While Canada’s labour market has performed well, particularly relative to that of the United States, imbalances between unemployment and job vacancies have risen over the recovery. Canadian firms are experiencing more difficulty in hiring than the unemployment situation would normally warrant. Canada’s unemployment rate is around 7 per cent, about 1 percentage point above its pre-recession level, whereas the job vacancy rate (the share of jobs available that are unfilled) reached 4.1 per cent in September 2013, a level similar to its pre-recession level (Chart 2.14). This suggests that unemployed individuals have more difficulty filling vacant positions. Difficulty in hiring has become particularly challenging in certain occupations, including skilled trades in sectors such as mining, oil and gas extraction and construction. Canadian employers also have ongoing difficulty hiring high-skilled professionals in science-based occupations such as engineers and architects.
This suggests that some Canadians remain unemployed because they do not have the right skills for the available jobs in expanding sectors and regions. Budget 2013 took steps to ensure federal labour market funding supports demand-driven programming informed by employer needs, creates opportunities for apprentices, and maximizes labour market outcomes for under-represented groups, including persons with disabilities, youth, Aboriginal peoples and newcomers.
In spite of the recent rise in the job vacancy rate, Canada’s labour market performance remains the strongest in the G-7, which has been reflected in solid real GDP growth. Indeed, Canada has recorded the strongest increase in real GDP among G-7 countries during the recession and the recovery, with real GDP up 5.5 per cent relative to its pre-recession peak (Chart 2.15).
Economic growth in Canada over the recovery has been driven by sustained growth in real private domestic demand, that is, the sum of spending by Canadian households and businesses, which has increased every quarter since the end of the recession. Indeed, Canada is the only G-7 country to have recorded continuous growth in real private domestic demand over this period. The sustained growth in real private domestic demand has been led by robust business non-residential investment, which has increased at an average annual rate of 7.9 per cent over the recovery. As a result, Canada is the only G-7 country to have more than fully recovered business investment lost during the recession (Chart 2.16).
However, despite the strength of Canada’s domestic economy, overall economic growth has been dampened by a weak external environment and slow export growth. This is particularly true since the beginning of 2012, as growth in private domestic demand has remained positive, albeit modest, with quarterly growth averaging 2.2 per cent, while real exports have declined by an average of 0.7 per cent per quarter (Chart 2.17).
Ongoing uncertainty in the global economy has also begun to weigh on business investment growth, which slowed to 4.9 per cent in 2012 from an average pace of 11.5 per cent earlier in the recovery. Growth in 2013 has continued to moderate, leaving real business investment in the first half of 2013 up only 0.9 per cent relative to the same period a year earlier. The impact of global uncertainty was underscored in the Bank of Canada’s Autumn 2013 Business Outlook Survey, in which firms indicated that weak current demand and uncertainty over future demand were weighing on investment decisions.
Overall, Canadian real GDP growth has been modest since the beginning of 2012, averaging 1.3 per cent, compared to average growth of 3.1 per cent over the earlier part of the recovery (Chart 2.18). However, growth strengthened in the first half of 2013, as real GDP grew by 2.2 per cent in the first quarter followed by an increase of 1.7 per cent in the second quarter. Growth in the second quarter was negatively impacted by the June southern Alberta floods and Quebec construction strikes. The Department of Finance estimates that these two events reduced growth by about 0.5 percentage points during the quarter, such that the underlying growth would have been about 2.2 per cent, or about the same rate as recorded in the first quarter. This lost output will likely be recouped in subsequent quarters, reflecting a catch-up in lost hours worked in the Quebec construction industry, as well as ongoing clean-up and reconstruction efforts in the many affected communities in Alberta.
Global economic weakness and moderate domestic growth have also been reflected in lower prices in Canada. Continued price declines for some of our globally traded commodities have dampened Canada’s terms of trade, or the price of our exports relative to our imports. As well, the ongoing modest pace of domestic growth since early 2012 has dampened growth in Canadian consumer prices. While this phenomenon has been seen in most advanced economies, Canada has been particularly affected (Chart 2.19).
Together, these factors have pushed down GDP inflation, the broadest measure of economy-wide prices, since early 2012. This, along with weaker real GDP growth, has resulted in weaker growth in nominal GDP, the broadest single measure of the tax base (Chart 2.20). As a result, nominal GDP growth has averaged just 2.3 per cent per quarter since the beginning of 2012, compared to 6.3 per cent over the earlier part of the recovery.
Canadian Economic Outlook—Private Sector Forecasts
The average of private sector economic forecasts has been used as the basis for fiscal planning since 1994 and introduces an element of independence into the Government’s fiscal forecast. This practice has been supported by international organizations such as the IMF.
The Department of Finance regularly surveys private sector economists on their views on the outlook for the Canadian economy. The economic forecast presented in this section is based on a survey conducted in September 2013, and includes the views of 14 private sector economists.
The September 2013 survey of private sector economists included:
- BMO Capital Markets;
- Caisse de dépôt et placement du Québec;
- Canadian Federation of Independent Business;
- CIBC World Markets;
- The Conference Board of Canada;
- Deutsche Bank of Canada;
- IHS Global Insight;
- Laurentian Bank Securities;
- National Bank Financial Group;
- Royal Bank of Canada;
- TD Bank Financial Group; and
- the University of Toronto (Policy and Economic Analysis Program).
The private sector economists’ outlook for Canadian real GDP growth over the next five years is unchanged, on average, from their expectations at the time of Budget 2013 (Chart 2.21). Private sector economists expect growth of 2.4 per cent for the third quarter of 2013, in line with monthly GDP data through August. For 2013 as a whole, the economists expect growth of 1.7 per cent, rising to 2.4 per cent in 2014. Beyond 2014, real GDP growth is expected to average 2.4 per cent.
While the private sector forecast for real GDP growth is largely unchanged since Budget 2013, weakness in domestic inflation and global commodity prices has led economists to reduce their outlooks for nominal GDP growth in 2013 and 2014. This has reduced the projected level of nominal GDP by about $11 billion, on average, over the 2013 to 2017 period, compared to the outlook in Budget 2013.
The economists expect unemployment rates to be largely unchanged from the outlook in Budget 2013. They project that the unemployment rate will continue to gradually decline over the forecast horizon and reach 6.2 per cent in 2018, close to its average level of 6.1 per cent prevailing in the two years prior to the recession.
Consumer Price Index (CPI) inflation is projected to be just 1.2 per cent in 2013 and 1.8 per cent in 2014, both lower than expected at the time of Budget 2013. However, private sector economists expect the CPI inflation rate to return to the mid-point of the Bank of Canada’s inflation target range by 2015.
Private sector economists have lowered their outlook for short-term interest rates by 20 basis points, on average, between 2013 and 2017 compared to the outlook presented in Budget 2013. On average, the economists’ forecast for short-term interest rates is consistent with rate increases starting in the fourth quarter of 2014.
The economists have revised up their outlook for long-term interest rates by 20 basis points in 2013 and 30 basis points in 2014, mainly reflecting recent rises in U.S. long-term interest rates, which have spilled over to other countries, including Canada.
Finally, the private sector expectation for GDP inflation is consistent with broadly flat commodity prices over the forecast horizon.
|Real GDP growth|
|Budget 2013/March 2013 survey||1.6||2.5||2.6||2.4||2.3||–||2.3|
|Update 2013/September 2013 survey||1.7||2.4||2.6||2.4||2.3||2.2||2.3|
|Budget 2013/March 2013 survey||1.7||2.1||2.0||2.0||2.0||–||2.0|
|Update 2013/September 2013 survey||1.3||1.8||2.0||2.0||2.0||2.0||1.8|
|Nominal GDP growth|
|Budget 2013/March 2013 survey||3.3||4.7||4.7||4.4||4.3||–||4.3|
|Update 2013/September 2013 survey||3.0||4.2||4.6||4.5||4.4||4.3||4.1|
|Nominal GDP level (billions of dollars)|
|Budget 2013/March 2013 survey||1,878||1,966||2,058||2,149||2,241||–||–|
|Update 2013/September 2013 survey||1,875||1,954||2,044||2,136||2,229||2,324||–|
|Difference between Update 2013
and Budget 2013
|3-month treasury bill rate|
|Budget 2013/March 2013 survey||1.0||1.3||2.2||3.3||3.8||–||2.3|
|Update 2013/September 2013 survey||1.0||1.1||1.8||3.1||3.7||4.0||2.1|
|10-year government bond rate|
|Budget 2013/March 2013 survey||2.1||2.8||3.5||4.1||4.6||–||3.4|
|Update 2013/September 2013 survey||2.3||3.1||3.5||4.1||4.6||4.8||3.5|
|Exchange rate (US cents/C$)|
|Budget 2013/March 2013 survey||98.9||100.7||100.9||99.3||98.8||–||99.7|
|Update 2013/September 2013 survey||97.3||96.8||97.2||98.0||97.7||98.1||97.4|
|Budget 2013/March 2013 survey||7.1||6.9||6.7||6.5||6.4||–||6.7|
|Update 2013/September 2013 survey||7.1||6.9||6.6||6.4||6.3||6.2||6.7|
|Consumer Price Index inflation|
|Budget 2013/March 2013 survey||1.3||2.0||2.0||2.0||2.0||–||1.8|
|Update 2013/September 2013 survey||1.2||1.8||2.0||2.0||2.0||2.0||1.8|
|U.S. real GDP growth|
|Budget 2013/March 2013 survey||1.9||2.9||3.1||3.0||2.8||–||2.7|
|Update 2013/September 2013 survey||1.6||2.9||3.1||3.1||2.9||2.7||2.7|
|Sources: Budget 2013; Department of Finance March 2013 and September 2013 surveys of private sector economists.|
Revisions to the Private Sector Forecast Since 2011
Coming out of the 2008–09 recession, Canada’s economy rebounded strongly. However, beginning in 2011, the global economic situation and outlook deteriorated as a result of the intensification of the euro area sovereign debt and banking crisis and rising uncertainty regarding U.S. fiscal policy. Reflecting these developments, private sector economists have revised down their outlook for real GDP growth for 2012, 2013 and 2014, since the time of Budget 2011 (Chart 2.22).
At the same time, the deterioration in global economic conditions has resulted in softer global commodity prices. Together with a weaker outlook for domestic inflation, this has led to a downward revision to the outlook for GDP inflation since Budget 2011. Along with weaker real GDP growth, this has had a significant impact on the outlook for nominal GDP growth.
Indeed, nominal GDP growth in 2012 was about 1.6 percentage points lower than expected at the time of Budget 2011. Moreover, forecasts for nominal GDP growth in 2013 and 2014 have been revised down from Budget 2011 by 1.9 and 0.3 percentage points, respectively, in this Update. As a result, the level of nominal GDP in 2012 was about $27 billion lower than anticipated in Budget 2011. Looking ahead, the economists now anticipate that the level of nominal GDP will be about $63 billion lower in 2013 and $71 billion lower in 2014 than the levels expected in Budget 2011. As nominal GDP is the broadest single measure of the tax base, this means significantly lower government revenue than was anticipated in Budget 2011.
On October 28, 2013, the Minister of Finance met with the private sector economists to discuss the economic projections resulting from the September 2013 survey, as well as the risks surrounding the outlook. At that time, the economists agreed that the average forecast from the September survey was a reasonable basis for fiscal planning. The economists also felt that while the risk of an extreme negative outcome has lessened since earlier in the recovery, overall risks remain tilted to the downside.
The key risks to the outlook remain external to the Canadian economy, stemming from ongoing uncertainty over U.S. fiscal policy and the potential for a flare-up in the euro area sovereign debt and banking crisis.
As the September survey of private sector economists was conducted prior to the U.S. government shutdown, there is a risk that U.S. real GDP growth could be weaker than expected in the short term, particularly if uncertainty over the resolution of the situation translated into weaker confidence and lower private sector spending. Although U.S. policy makers have agreed to restore government spending authority and to raise the debt limit, the agreement reached in mid-October is a very short-term one, raising the possibility of ongoing disruptive fiscal debates and further shocks to consumer and business confidence until more durable resolutions to these issues are found. Over the medium term, growth in the U.S. will be affected by the ability of the government to develop a credible plan for reducing its debt burden.
There is also a risk that deficit reduction measures could weigh on U.S. growth in 2014 by more than is currently expected. Notwithstanding the outcome of future spending and debt negotiations, deficit reduction measures (including spending reductions and tax increases) are currently set to be smaller in 2014 than in 2013. However, the economic impact of these measures often takes time to build, meaning that deficit reduction measures that came into effect in 2013 may still have negative impacts on growth in 2014 as well.
Overall, the probability of a severe negative outcome in Europe in the near term has diminished, but downside risks remain elevated. This reflects the continued potential for a flare-up in the euro area crisis, particularly in light of its very slow overall growth and emerging disparities in growth rates between individual countries.
Further, there is a possibility of a more prolonged slowdown in emerging economies, which would affect Canada somewhat through lower real exports, but more significantly, through declines in global commodity prices. More generally, if any of the above external risks should materialize, this would likely translate into lower global commodity prices.
On the domestic front, the main risk to the outlook continues to be the high levels of debt held by Canadian households. While the pace of household credit growth has continued to slow, the recent pick‑up in housing market activity, if it reflects stronger underlying momentum, could translate into further debt accumulation.
In light of these risks, for fiscal planning purposes, the Government has maintained the downward adjustment for risk to the private sector forecast for nominal GDP at $20 billion for 2014 through 2018 (Table 2.2). The downward adjustment for 2013 is reduced to $10 billion, as actual economic data are now available for two-thirds of the year, meaning the risk for 2013 as a whole has been reduced. The Government will continue to evaluate economic developments and risks to determine whether or not it would be appropriate to maintain this adjustment for risk in the future. The fiscal outlook is presented in Chapter 3.
|September 2013 survey of private sector economists||1,875||1,954||2,044||2,136||2,229||2,324|
|Update 2013 fiscal planning assumption||1,865||1,934||2,024||2,116||2,209||2,304|
|Adjustment for risk||-10||-20||-20||-20||-20||-20|
|Adjustment for risk in Budget 2013||-20||-20||-20||-20||-20||–|
 Conceptual differences raise the Canadian unemployment rate relative to the U.S. rate. In particular, Statistics Canada considers as unemployed those passively looking for work (e.g. reading want ads) as well as those who will begin work in the near future, while the U.S. Bureau of Labor Statistics does not include either group in the labour force. In addition, the Canadian methodology includes 15-year-olds (who have a higher-than-average unemployment rate), while the U.S. does not.
 The U.S. unemployment rate would have remained at about 10 per cent if the labour force participation rate had declined by about the same as in Canada, assuming that the number of employed remained the same.
 Budget 2011 nominal GDP levels have been restated to reflect historical revisions to the Canadian System of National Accounts since Budget 2011 by Statistics Canada.