Coronavirus, poor harvest, blockades could widen deficit

Economists trim growth forecasts for current year

OTTAWA • The fast-spreading coronavirus, prolonged rail blockades and a lacklustre harvest season could widen Finance Minister Bill Morneau’s upcoming budget deficit, already running higher than initial estimates.

The Canadian economy slowed to an annualized growth rate of just 0.3 per cent in the fourth quarter of 2019, according to Statistics Canada, the worst since a wildfire swept through northern Alberta in 2016 and shut in large volumes of oil production.

Private-sector investment is meanwhile expected to remain flat through 2020, amid tepid manufacturing sales and exports. The leading index on the TSX slid more than 700 points as of early Friday afternoon, reflecting fears the coronavirus could spread at an increasingly fast pace through the U.S., Canada and elsewhere.

The downshift could crimp revenues available to Morneau as he prepares his annual budget, set to be tabled in coming weeks. Recent turbulence adds new layers of uncertainty to a Canadian economy that was already expected to grow at a slower pace than previous years, as concerns over global economic growth persist.

“Mechanically, that is going to have some impact on the starting point for the deficit for this year,” said Brian Depratto, senior economist at Toronto Dominion Bank.

Morneau posted a deficit projection of $26.6 billion in December, well above an earlier estimate of $19.8 billion, due to higher spending and accounting charges. According to Finance Canada’s own projections, the federal deficit widens by roughly $4.9 billion for every one per cent drop in GDP.

TD has trimmed back its estimates for the Canadian economy to 1.4 per cent growth over 2020, down from 1.6 per cent earlier this year, reflecting a general consensus among analysts. That deficit could continue to grow if effects from the virus exceed expectations.

“There’s a lot of uncertainty right now, so to the extent that we could see a deeper impact from the coronavirus, that would further weaken that starting point,” he said. He stressed that virus impacts are especially hard to predict.

In 2018-19, Ottawa ran a deficit of $14 billion, slightly lower than it had projected. According to new data published Friday, by comparison, Ottawa was already running an $11-billion deficit over the nine months ended December 2019, well above the $300 million surplus it was running over the same period in 2018.

Morneau warned earlier this month the virus was “undoubtedly going to have an economic impact” in Canada, as new cases began to emerge outside China.

CN Rail also shut down its rail services on several crucial conduits for the better part of two weeks, as activists blockaded rail lines as part of a protest purportedly in opposition to a natural gas pipeline in British Columbia. The company has warned that weeks worth of backlogs will have to be sorted through when services return to normal.

On Friday, Statistics Canada also cited pipeline shutdowns, a United Auto Workers strike that slowed automotive outputs, and global trade tensions as reasons for the slowdown.

Still, analysts widely agree that the economy should recover quickly from short-term hits, particularly if the coronavirus can be contained within a reasonable timeline. Unemployment rates in Canada remain low, while tax revenues and household spending have continued to climb.

“We do expect the economy to bounce back in the second half of the year, and we expect it to bounce back pretty vigorously,” said Doug Porter, chief economist at Bank of Montreal.

BMO has also trimmed back its 2020 economic outlook, from 1.7 per cent down to 1.2 per cent over the year.

Porter said the recent downshift in the economy is unlikely to have a major impact on the deficit that was already set to surpass $26 billion, but said it could raise questions about spending in future years.

“The bigger issue will be the government’s decision to address higher spending,” he said.

The Trudeau government has continued to run deficits as spending climbs, even after it initially promised to return to a surplus by 2019. The Liberals later abandoned any plans to return to balance, and now project they will trim the deficit down to $11.6-billion by 2025.

Trudeau is also likely to face increasing calls for new spending measures from opposition parties, as the Liberals seek to balance their minority position in the House of Commons. Already opposition members have called on Ottawa for more spending on programs like pharmacare and social housing.

The upcoming budget will also account for some of the promises made by Trudeau during the 2019 election campaign, which have yet to be spent. And analysts say it is likely to include new spending packages aimed at industries suffering amid the economic slowdown.

According to federal projections, a promised tax cut for middle-income earners will also cost the government $700 million in foregone revenues in 2020. Separate election promises made by Trudeau amounted to another $1.5 billion in unplanned expenses.

WE DO EXPECT THE ECONOMY TO BOUNCE BACK IN THE SECOND HALF.