Analysis lays out the economic landscape facing Canada in the months and years ahead
As Canada prepares to unveil its federal budget for the year ahead, Canadian Imperial Bank of Commerce (CIBC) chief economist Avery Shenfeld assessed its possible implications, including potential changes to taxes, healthcare spending, and social programs.
The budget looks set to include initiatives in the green energy space, support for low-income Canadians, and funding for the recent health care deal with provinces, although an increase in the GST seems unlikely given the political climate and the government's reluctance to implement broad-based tax increases.
Pressure to increase spending in the years ahead
While the government may be cautious in adding further stimulus to the economy, it may still face pressure to increase spending in the years ahead, particularly in the face of longer-term federal fiscal sustainability concerns, according to Shenfeld. Spending targets several years out will be important to watch as a share of GDP, as they are still higher than pre-pandemic levels. If this trend continues, it may require offsetting increases in tax rates down the line.
Canada's fiscal sustainability vs other countries
The analysis noted that despite these concerns, Canada still looks to be in decent shape on overall federal/provincial balances relative to other major industrialized countries. However, the budget could provide important clues about longer-term fiscal sustainability and the government's plans for economic growth and support.
Canadian economy shows signs of growth
CIBC senior economist Andrew Grantham's analysis, January shows a 0.6% gain in monthly GDP in Canada, with this growth driven in part by the rebound of unplanned maintenance in the oil and gas sector and the impact of harsh weather on transportation. Additionally, there has been a big jump in employment, a surge in manufacturing shipments, and solid gains in retail and wholesale spending.
This growth forecast is a few ticks better than the advanced estimate and indicates a strong start to 2023. However, early indications for February point to a modest giveback during that month. Despite the weak growth during the second half of 2022, the first quarter of 2023 is likely to prove stronger than previously expected, tracking between a 1.5-2.0% annualized pace for Q1.
While growth in the Canadian economy is being driven by strength in oil and gas, manufacturing, and wholesale, it is not expected to add to inflationary concerns. These improvements on the supply side of the economy should not cause any inflationary pressures.
The positive trend in GDP growth is good news for Canada's economic outlook in 2023, and further data on growth in February will be important to watch.