The Canadian economy may grow slightly faster this year than previously expected, private sector economists suggested on Monday, providing scope for the Conservative government to eliminate the budget deficit sooner than planned.
Finance Minister Jim Flaherty met with 13 economists to get their economic forecasts, which will feed into the March 29 federal budget. But the consensus numbers were not released because the economists needed more time to incorporate new “encouraging” data released by Statistics Canada on Friday, he said.
“The economists noted that the Canadian economy has been resilient over the last year and Canada will continue to see modest growth going forward,” Flaherty told reporters following the meeting.
“We’re going to follow up with the economists because the numbers last Friday were relatively encouraging ... so we agreed this morning we would follow up with them this week. We try to be as ‘au courant’ (up to date) as possible when we do the budget in terms of the prognostications.”
The economy actually slowed in the fourth quarter to 1.8% annualized growth, as was widely expected. But Statscan unexpectedly revised third-quarter growth to 4.2% from 3.5% previously and December growth beat estimates at 0.4%.
Immediately after Friday’s data was released, several economists said they would boost their projections for early 2012.
After meeting with Flaherty, Avery Shenfeld, chief economist at CIBC World Markets, told reporters the private-sector growth forecast for 2012 would not be substantially higher than the 2.1% provided last September, saying any change would be in the “decimal places.”
Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said he would likely raise his 2012 outlook to a range of 2.1% to 2.2% from 1.7%. Burleton sees the expanding economy boosting government revenues by roughly $4 billion or $5 billion a year, giving it plenty of wiggle room.
Economists cited the strengthening U.S. economy and a slightly reduced risk that the European debt crisis will spread as reasons for their brighter domestic outlook.
Ottawa has promised to balance the budget by 2015-16, partly by cutting spending by between $4 billion and $8 billion a year.
The shortfall is small by international standards at roughly 2% of GDP, but still taboo in a country that went from fiscal pariah for its bulging deficit in the early 1990s to darling of the G7 advanced economies for its decade-long string of surpluses up until the global financial crisis in 2008.
Still, critics fear the Conservatives will go too far in their austerity measures, leading to heavy public sector job losses and slower economic growth.
Flaherty repeated on Monday that the cuts will not be draconian. The budget deficit figures for the first nine months of the 2011-12 fiscal year suggest Ottawa is already ahead of schedule in its deficit-reduction plan. The shortfall in the April-December period was $17.69 billion, compared with Ottawa’s expectation of a $31 billion deficit in the full year.
HOUSING A CONCERN
In contrast to the United States, the housing market in Canada has been robust, leading to high levels of household debt as Canadians take advantage of low mortgage rates. But Flaherty stopped short of signaling any new restrictions on mortgages.
“There has been some moderation in the housing market. I remain concerned about the condo market, quite frankly,” he said.
“Interest rates are relatively low, so I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because rates will go up some day and I would not want people to get caught.”
The economists were divided on their prescriptions for dealing with the housing market. Doug Porter, deputy economist at BMO Capital Markets, contends that housing prices are only a problem in Toronto and Vancouver, but nationally do not show signs of overheating.
Ottawa has already intervened three times to tighten mortgage rules and Shenfeld urged it to allow time for those policy changes to have an impact.
Burleton, on the other hand, thinks further action is needed and sees a growing risk to the domestic economy from housing and debt. He suggests shortening the maximum amortization period for mortgage repayment to 25 years.
(Reporting by Louise Egan, Randall Palmer and David Ljunggren; editing by Rob Wilson)