PBO releases its Economic and Fiscal Outlook

The Parliamentary Budget Officer (PBO) today released his Economic and Fiscal Outlook. The report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings.

The PBO report projects growth in the Canadian economy to rebound sharply in the second quarter and remain robust in the second half of 2022 as the reopening of the economy continues. Given strong demand, continued supply constraints and elevated commodity prices, economy-wide inflation is projected to outpace real GDP growth in 2022.

“Inflation as measured by year-over-year changes in the Consumer Price Index (CPI), is projected to remain above its 2% target through 2022. However, as supply constraints ease and as energy prices recede from elevated levels, we project CPI inflation to return to target in early 2023,” says PBO Yves Giroux.

Based on the outlook for inflation and the output gap, the PBO projects that the Bank of Canada will increase its policy interest rate by a cumulative 75 basis points this year, lifting its rate to 1% by the end of 2022, and gradually raising it until it reaches 2.25% in early of 2024.

Based on current policy, the PBO projects budgetary deficits for 2021-22 and 2022-23 of $139.8 billion and $47.9 billion, respectively (or 5.6% and 1.8% of GDP). The federal debt-to-GDP ratio is projected to rise to 47.7% in 2021-22 and then gradually decline to 42.3% over the medium term.

Setting aside remaining electoral platform measures and the Government’s upcoming budget, the risks to the PBO projection are roughly balanced.

“Remaining platform measures amount to $48.5 billion in new spending and pose an upside risk to our deficit and debt projection. Should Budget 2022 contain significantly more permanent spending than currently anticipated, there is a risk that the declining debt-to-GDP trajectory we project over the medium term would be reversed,” adds Mr. Giroux.