Experts flag big debt amid rosy forecasts for GDP
Predicted slackening growth may require government to curb spending: economists
The Canadian economy is starting to find its feet, but historic debt levels could plague the government for years to come, with GDP growth slowing towards the middle of the decade, according to new forecasts.
In its latest two-year outlook, Hope at Last, the Conference Board of Canada predicts Canadian GDP will expand 5.8 per cent in 2021 and four per cent in 2022.
On Tuesday, TD Bank Group also raised its GDP forecast to about six per cent this year, while earlier this month, Royal Bank of Canada had upgraded its estimate to 6.3 per cent this year, from five per cent previously.
Statistics Canada will release its monthly GDP data for January on Wednesday.
“We've had an economy that's lost about 5.4 per cent of its GDP, its income generation, in 2020,” Pedro Antunes, chief economist at the Conference Board, said in an interview. “And we've essentially infused support and other measures ... worth probably around 15 per cent of GDP. So, we've borrowed that much to put back into the hands of households and consumers.”
In the report, Antunes said despite the economic rebound, Canada's government debt load has become “uncomfortably high,” and might necessitate fiscal austerity as soon as mid-decade, which could restrain the country's future growth prospects.
“I do think governments need to start thinking about this and planning forward,” he said.
“I mean, will we see something in the federal budget that speaks to the longer-term challenges? Because there's some very real challenges that we're going to be left with here.”
The federal government is set to unveil its first budget in two years on April 19.
Canada's debt-to- GDP ratio now stands at more than 100 per cent, and the federal government has set aside another $70 billion to $100 billion of stimulus to repair the economy after a COVID-induced recession last year.
But these expenses will need to be paid for.
“Right now, nobody wants to talk about it because nobody wants to impose tax measures or fiscal austerity at a time when the economy is still in such bad shape,” Antunes said.
“But I do think governments need to start thinking about this and planning forward.”
That potential restraint, coupled with weak capital investment, make Antunes “somewhat pessimistic” about the economic picture in three to five years.
“Despite the general positivity surrounding Canada's investment climate, we expect non-energy investment to rise only slowly in the first half of 2021, delaying a full recovery until beyond the short term,” Antunes wrote in the report.
On the bright side, the Conference Board expects higher oil prices could buoy Canadian GDP, with prices expected to average around US$68 this year and US$71 in 2022.
Strong commodity prices will keep the Canadian currency at around a steady US80 cents this year.
The Conference Board projects 0.7 per cent GDP growth in the first quarter, with economic activity weighed down by COVID -19 case counts that are still high in many regions and new strains of the virus that have public health experts worried.
TD Bank's senior economist Sri Thanabalasingam said in his note that the federal debt-to- GDP ratio could continue to trend upwards for the remainder of the recovery, after already blowing past its 1990s peak.
After that, the recovery will hinge on public health and vaccination programs.
Antunes said his projections count on the pandemic being largely over in Canada by fall.
Prime Minister Justin Trudeau has set a target for every Canadian to have access to the vaccines by September.
RBC economists Craig Wright, Dawn Desjardins and Nathan Jan zen revised their growth projections up wards for every province, partly because mass vaccinations are now on the horizon.
“The projected rise in vaccinations will allow restrictions to be eased and eventually eliminated clearing the path for spending on services to bounce back in the second half of 2021,” RBC said in its report.
“Government support for unemployed workers will continue in 2021 though demand will decline over the course of the year as the economy reopens and workers are rehired.”
Canadians have increased their savings dramatically, but analysts believe it is difficult to predict whether those savings will translate into pent-up consumer demand.
RBC estimates households' stockpiled about $200 billion in savings last year.
Conference Board's Antunes said the savings rate could be good news: “Either way you look at it, it's not bad for you to have households have a little bit more reserves in their savings,” he said.
“We were very concerned about households up until 2020, about how low the aggregate savings rate was.”
TD's Thanabalasingam said much of the savings has been the result of public health restrictions preventing wealthier households from splurging on purchases such as entertainment and vacations.
“These are households on the higher end of the income spectrum, who typically would spend on discretionary items,” he told the Financial Post.
“A lot of that increase in the savings rate itself is coming because households were forced to save.”
Thanabalasingam also echoed Antunes's prediction about the need for government to curtail spending, but stopped short of describing the potential reductions as austerity measures.
“I would see maybe some spending restraint down the road,” he said.
“Not right away, just because we're not out of the woods yet in terms of the pandemic ... but maybe down in the mid-decade, which sounds about right, in terms of restraining spending.”
Either way you look at it, it's not bad for you to have households have a little bit more reserves in their savings.