There is a recession looming large on 2023’s horizon, fellow Canadians, but how hard it will hit whose pocketbooks and business bottom lines depends on where you are and how the federal government manages the country’s finances over the next fiscal year.
That is the view of a number of economists in the leadup to Ottawa’s release of Canada’s 2023-24 budget.
Deloitte Canada’s pre-budget economic outlook includes a mild recession, but B.C., it notes, will be hit hard by a housing market downturn and lower revenue from forestry and other key goods producing sectors.
Meanwhile, the Justin Trudeau government’s enthusiasm for deficit financing is raising calls for Ottawa to surrender some of its fiscal policy flexibility and commit to balanced budget legislation or at least a set of guiding principles for the responsible fiscal management of taxpayer money.
Upwardly spiralling borrowing costs, a down-bound U.S. economy and increased global geopolitical uncertainty are all contributing factors to Deloitte’s recession prediction.
For B.C., the 2023 forecast is not good.
As Deloitte Canada’s Senior Manager of Economic Advisory Alicia Macdonald pointed out to BIV, the province’s forestry sector, which has been buoyed by the accelerated harvest of mountain pine beetle killed wood and soaring lumber prices, is now faced with several market challenges, including a slowdown in U.S. housing construction and other areas of its economy.
In addition, major infrastructure projects such as LNG Canada’s Kitimat export terminal and the trans-mountain pipeline expansion are winding down, and investment spending is declining in the province.
“We’re seeing all of those things come off this year at the same time, which is weighing on our growth prospects in B.C., and so those factors, even without the interest rate increase, have created a headwind for growth in B.C.” Macdonald said.... “And then when you lay on the impacts that we’re seeing on the consumer side, it’s unfortunately looking like the shine is coming off B.C.’s economy this year.”
But the global financial advisory firm’s outlook also noted that the recession’s projected severity has eased since 2022’s fourth quarter in part because strong labour market conditions are driving household income growth. It predicts that Canada’s real GDP will drop by 0.5 per cent this year but rebound with two per cent growth in 2024.
“We continue to see the province turn out jobs,” Macdonald said, “and [B.C. has] amongst some of the highest job vacancy rates, and so when it comes to the depth and duration of a recession, it really is measured by employment impacts…. And so that will act as a bit of a buffer to some of the more negative impacts and allow household incomes to continue to grow at a very, very modest pace and provide a bit of a floor to the downturn that we expect.”
Deloitte noted that consumers have shouldered much of the country’s tighter monetary policy in the form of higher borrowing costs. It pointed out, for example, that, in Q4 2022, interest payments on household debt had jumped 45 per cent year over year.
Meanwhile, the Bank of Canada’s Q4 2022 Business Outlook Survey found that overall business confidence across the country continues to weaken in the face of softening demand, rising interest rates and ongoing cost pressures. Small wonder then that business investment is expected to shrink in 2023.
That, unfortunately, is not a new story.
“Business investment in Canada has really been our Achilles heel for several years now,” Macdonald said, “ever since commodity prices crashed at the end of 2014. In some years, it's been so weak that our capital stock is shrinking once you account for depreciation. And so anything that the federal government can do to encourage more private sector investment is essential [and] not just for our near-term economic growth prospects.”
Macdonald pointed out that business investment is needed now to ensure Canada’s economy can grow and generate long-term prosperity in a country whose overall output is set to slow significantly because of its aging population.
But B.C. and the rest of the country face more than business investment challenges.
KPMG’s national pre-budget survey of more than 500 Canadian business leaders found that 80 per cent of survey respondents were concerned about increased tax burdens, supply chain risks, green economy pressures and economic volatility. They want the federal government to invest in business tax relief so they can compete with their counterparts in the United States.
Their list of top priorities that need to be addressed in the 2023 federal budget includes strengthening Canada’s supply chain, support for small and medium enterprises hurt by higher interest rates and borrowing costs, funding to develop made-in-Canada renewable energy technologies and training and upskilling initiatives for employers.
Meanwhile, the CD Howe Institute has taken aim at the federal government’s claims that its current fiscal plan is prudent, sustainable and fair to future generations.
A March 23 policy paper argues that Finance Minister Chrystia Freeland’s plan is none of the above.
Ottawa Needs a New Approach to Fiscal Policy concedes that policy measures costing approximately $350 billion instituted during the pandemic were warranted to stabilize the country’s economy and protect the health of its citizenry. But authors John Lester and Alex Laurin note that, since 2020-21, the federal government has debt-financed non-pandemic related initiatives that will cost the country another $250 billion by 2025-26.
They argue that adding fiscal stimulus to an economy that the 2021 budget indicated was “poised to come roaring back” was questionable at best.
It also added fuel to the country’s inflationary fire.
Lester and Laurin maintain that piling up more debt-financed spending “is unfair to future generations” because “the people benefiting from the spending do not pay its full cost.”
That cost, they point out, will be even higher if interest payments on Canada’s debt rise faster than government revenue.
To hold federal government spending in check or at least to provide some measure of accountability and restraint in what too often becomes electoral leverage for the party in power, CD Howe proposes that either a debt anchor establishing a medium-term objective or a set of guiding principles for fiscal policy be imposed on the government.
New Zealand has opted for the latter option.
Lester and Laurin note that its set of principles “include a requirement to maintain debt at a prudent level by balancing the budget over a reasonable period.”
With a balanced budget nowhere in sight under the current Liberal government in Ottawa, consideration of guidelines for spending taxpayer money would be a first step in returning prudence to the country’s budget process.