True GDP growth will fall well below federal and provincial government forecasts for 2011, according to the findings of a new report from CIBC World Markets Inc.
The end of government stimulus mixed with the reluctance of U.S. consumers to spend and a softening of the Canadian housing market are expectwed to be the main culprits.
“That softer growth outlook should not, however, lead to a rethinking about the need to begin to tighten the fiscal stance,” says Avery Shenfeld, chief economist at CIBC. “At this point, Canada is not the U.S. or Europe. If policy needs to adjust to a more challenging climate abroad, it should be done by backing away from plans for tightening through even higher interest rates. Only if the Bank of Canada were forced to take rates back to zero would it be appropriate to postpone a much-needed, if gradual, path back to fiscal rectitude.”
Shenfeld says Ottawa should have about $8 billion more revenue than forecast from 2010 to pad the books for weaker than expected growth in the year ahead.
The report finds that growth in all provinces will be down, with the exception of Saskatchewan, which saw bad weather punish its agriculture sector. CIBC forecasts real GDP growth to fall nearly a full percentage point below budget forecasts in 2011, with central Canada’s manufacturing sector suffering the biggest hit.
“It was nice while it lasted, but provincial economies are now in the process of downshifting from a better-than-expected 2010 to a more tepid growth pace for 2011,” says Warren Lovely, government strategist at CIBC. “For job seekers, businesses and government budget makers, the implications will be significant.”
With the unprecedented fiscal stimulus and inventory rebuilding coming to an end in the U.S., CIBC forecasts Ontario will be hit the hardest given that it still sends some 80 per cent of its exports south of the border. It calls for the province’s real GDP growth to fall 1.6 per cent below the prior budget’s forecast in 2011. Québec and Manitoba, which also have large export-oriented factory sectors, will see growth fall well below expectations, coming up 1.1 per cent and 1.0 per cent shy of forecast, respectively.
Once again, the country’s resource-rich provinces, B.C, Alberta, Saskatchewan and Newfoundland and Labrador, will lead the country in growth, but they too will struggle to meet budget forecasts. Output from Alberta’s oil sands, where investment has reignited, is set to climb steadily in the years ahead.