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Economy to ‘stagnate,’ federal deficit expected to balloon to $46.5B this year: PBO

OTTAWA – The parliamentary price range officer says greater rates of interest will lead the economic system to stagnate within the second half of the yr, with a brand new report suggesting the federal deficit will rise considerably this fiscal yr.

The PBO launched its financial and monetary outlook Friday, offering up to date projections for the economic system and federal funds as excessive rates of interest weigh on progress.

The price range officer additionally says it expects client spending to stay weak within the second half of 2023 and all through the primary half of 2024.

Confronted with slower progress in authorities revenues and better bills, the federal deficit is projected to rise to $46.5 billion in 2023-24, up from an estimated $38.7 billion for 2022-23.

Assuming no new measures and momentary measures expire, the deficit is predicted to trace downward, falling to $8.2 billion in 2028-29.

The PBO additionally initiatives the debt-to-GDP ratio to leap this fiscal yr to 42.6 per cent.

That ratio is predicted to fall to 37.8 per cent in 2028-29 – assuming no new measures – which is above its pre-pandemic stage of 31.2 per cent of GDP in 2019-20.

Greater rates of interest are elevating the price of debt for the federal authorities. The PBO says it expects the debt servicing ratio, which refers to public debt fees relative to tax revenues, will peak at 12.0 per cent this fiscal yr earlier than progressively falling again to 11.0 per cent in 2028-29.

Because the Financial institution of Canada gears up for a charge choice this month, the PBO’s projection assumes no additional charge hikes. As a substitute, it initiatives the central financial institution will maintain its key rate of interest at 5 per cent and start slicing charges in April 2024.

Its inflation forecast anticipates a return to 2 per cent inflation by the tip of subsequent yr.

The Financial institution of Canada is about to make its subsequent rate of interest choice on Oct. 25. Throughout a digital roundtable with reporters on Friday, governor Tiff Macklem mentioned he expects the governing council will debate whether or not it ought to exert endurance or elevate charges additional.

The economic system has softened this yr, shrinking within the second quarter as client spending slows. The labour market is not as scorching because it was final yr: job vacancies have fallen and the unemployment charge has inched greater.

Whereas this downward momentum is predicted to proceed, inflation has confirmed to be sticky.

Canada’s inflation charge fell to 2.8 per cent in June however climbed again as much as 4.0 per cent in August as underlying value pressures stay excessive.

This report by The Canadian Press was first printed Oct. 13, 2023.

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