GDP Growth To Drag With Less Government Spending

Economy Growth to Decrease

Looks like the Bank of Canada has been a tad too optimistic about the government’s willingness to spend – and that recent belt-tightening measures will amount to a 0.2 per cent drag on our country’s GDP growth.

According to a CIBC Canadian Employment Insights Report, government spending is anticipated to decline by 0.9 per cent in 2013 and 2014 – showing that the BoC’s initial growth forecast overshot by a half of a per cent.

While this discrepancy may seem piddly, it could mean the difference between above-potential growth and raising interest rates. It could also mean that post-recession economic growth may not catch up in time to offset calls for monetary tightening.

This “belt tightening” refers to a drop in government expenditures, in addition to a lack of major offset measures to counter planned tax reductions.

One Step Forward, Two Steps Back

According to Avery Shenfeld, chief economist at CIBC, the next two years pose a fiscal challenge.  “We see Canadian real GDP limping ahead by just 2 per cent next year. So despite the stronger handoff from last year and the considerable padding built into the current year’s targets, a lackluster growth outlook for 2013 could wash that benefit away in terms of the room for spending growth,” he said in a statement. That makes the existing, lean-and-mean two-year fiscal plans, as laid out in 2012 budget documents, a reasonable starting point for assessing how much further fiscal drag is in store for 2013, even if, as they say, plans can change.”

He adds that had government spending stayed on trend for a 3 per cent increase year-over-year (which was the pre-recession average prior to 2008), GDP growth would have measured at 3 per cent – as opposed to the current 1.8 per cent.

Still Standing Strong

Despite GDP growth not quite up to snuff, Canadians can rest assured that our economy still stands strong in comparison to other nations, particularly our neighbours to the south. Shenfield states that the fiscal drag is to be expected – and that we’ll fare better than most. “Having started from a combined federal/provincial deficit of only a third of that stateside, there’s no equivalent threat of an outright recession being induced by cuts coming from Ottawa and the provinces. We’ll get through our fiscal drag much sooner than the U.S. with a lot less pain in total,” he says.

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