Government spending will decline 0.9% in 2013 to 2014—a 0.2 percentage point drag on real GDP growth, finds CIBC.
“Our analysis points to yet another drop in real expenditures, with no major offset from planned tax reductions,” says Avery Shenfeld, chief economist at CIBC.
He adds although the drop may not seem severe, it is when compared to the 0.3% boost the BoC forecast.
“The result is the Bank’s forecast could be about 0.5 percentage points too high, enough to make the difference between growth being above potential, requiring interest rate hikes, or not fast enough to narrow the output gap and call for monetary tightening,” warns Shenfeld.
The report notes currently, nominal GDP growth hasn’t lived up to expectations. Related weakness in commodities has dampened the outlook for some resource revenues. However, fiscal padding should compensate for the current year’s economic hiccup, allowing federal and provincial budget balances to once again beat official targets.
But this may not be the case next year.
“We see Canadian real GDP limping ahead by just 2%,” says Shenfeld. “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.”
He adds, “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.”
But compared to what’s happening in other countries, Canada is still better off, notes CIBC.
“We’ll get through our fiscal drag much sooner than the U.S. with a lot less pain,” he says.