The Bank of Canada (BoC) projected that Canada’s GDP will fall 7.8% in 2020
The additional decline in economic activity would add C$8 billion to the deficit, according to an estimate by Stephen Brown, senior Canada economist at Capital Economics, while an analysis in the 2019 federal budget estimated that a 1% decrease in GDP growth would impact the budgetary balance by nearly C$5 billion.Ottawa’s fiscal outlook is based on forecasts in May from private-sector economists.
Last month, Canada lost one of its coveted triple-A ratings when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 pandemic shutdowns. Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating.
Canada’s budget deficit is expected to hit C$343.2 billion in the 2020-2021 fiscal year, the largest shortfall since World War Two. While an C$8 billion increase in the shortfall would be proportionally small, slower-than-expected growth could encourage Ottawa to spend more on stimulus after already rolling out about C$212 billion in direct aid.
“If the government chose to react to that more pessimistic economic projection by introducing new spending, then the deficit could end up being materially wider,” said Royce Mendes, a senior economist at CIBC Capital Markets.Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter.
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