Economic and Fiscal Monitor - February 2019

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Following solid performance through the first three quarters of 2018, growth in the Canadian economy slowed in the fourth quarter.

  • PBO estimates that real GDP advanced by 1.0 per cent (at an annual rate) in the fourth quarter of 2018, half of its third quarter pace.
  • We expect real GDP growth to remain sluggish at 1.0 per cent in the first quarter of 2019, mainly due to declines in both residential and business investment.

The projected slowdown in the Canadian economy stems, in part, from developments in the oil sector. During the last quarter of 2018, prices for global crude oil benchmarks tumbled. Barrels of Western Canadian Select sold at prices as low as US$14 but then recovered sharply following the Government of Alberta’s mandatory production limit that was introduced in early December.

Given our expectations for both lower real GDP growth and inflation, we project that nominal GDP—the broadest single measure of the Government’s tax base—will amount to $2.2 trillion in 2018 for the year as a whole. After adjusting for historical revisions, this is $2.1 billion or 0.1 per cent lower than projected in our October 2018 Economic and Fiscal Outlook.

Based on the most recent year-to-date financial results, PBO projects that the Government’s budgetary balance for 2018-19 will be a deficit of $16.0 billion (0.7 per cent of GDP).

  • The revised budgetary deficit of $16.0 billion in 2018-19 is $3.4 billion lower than projected in our October 2018 outlook.
  • PBO’s revised estimate of the budgetary deficit is $2.1 billion lower than the $18.1 billion deficit projected by Finance Canada in the 2018 Fall Economic Statement, which included a $3.0 billion adjustment for risk.

The revision to PBO’s projected budgetary deficit for 2018-19 reflects a $2.6 billion increase in our estimate for revenues and a $0.8 billion decrease in our estimate for expenses.

Despite including additional measures since Budget 2018, as well as those announced in the Government’s Fall Economic Statement, our estimate of the budgetary deficit in 2018-19 was revised down significantly due to stronger-than-expected growth in income tax revenues. Given downward revisions to our nominal GDP projection, this suggests higher tax yields than we anticipated at the time of our October outlook.

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