Canadian Manufacturing

Government belt-tightening could slow Canadian GDP growth through 2013: CIBC

New report says government spending will drop 0.9 per cent in 2013/14



TORONTO—Canadian governments will take a bite out of the country’s real gross domestic product (GDP) growth in 2013, not boost it as forecast by the Bank of Canada, a new CIBC report claims.

The bank’s latest Canadian Employment Insights Report says government spending will take a modest 0.9 per cent drop in 2013/14, which represents an approximately 0.2 percentage point reduction in real GDP growth.

“Just as we warned that the Bank (of Canada) was too optimistic in its initial 2012 call, its 2013 forecast also looks to be counting its government spending chickens well before they will be hatched,” CIBC chief economist Avery Shenfeld said in a statement about the report findings.

“That doesn’t look like a big deal, until one contrasts it with the 0.3 per cent boost to growth in the Bank of Canada forecast.”

The result, according to Shenfeld, is a Bank of Canada forecast that may be 0.5 percentage points too high, which he says is enough to have a difference between growth being above potential—requiring interest rate hikes—or, if more in line with CIBC’s forecast of two per cent growth next year, not fast enough to narrow the output gap and call for a tighter grasp on spending next year.

Shenfeld said Canada’s economy has done well enough to make it prudent to sacrifice some growth in order to right the fiscal ship, and have the room to respond with stimulus should the economy take a new hit down the road.

He also claims that a longer-term look at government spending suggests Canada has yet to complete the full wind-down from the recession-related jump in government’s role in the economy.

Nominal government spending on goods, services and capital investment is running about 0.5 per cent above its historical average share of GDP, according to the report, and even further above where it stood in the last cycle.

However, the report says federal and provincial governments are committed to additional spending cuts in an effort to reduce deficits.

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