Continuing to raise the policy rate in an attempt to curb inflation might end up triggering a recession, the Parliamentary Budget Officer (PBO) warned in a report released last Thursday.
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According to the “risk scenario” put together by the PBO, the US Federal Reserve and the Bank of Canada would continue to raise their key rates, respectively, to 5.25% and 5% in early 2023, before starting to lower rates in 2024.
In doing so, Canada’s real gross domestic product (GDP) would begin to decline as early as late 2022 and continue to contract in 2023, plunging the country into recession.
The economy would eventually lose 177,000 jobs by the end of 2024, while the unemployment rate would expect 6.2%, down from 5.2% in October 2022.
“Due to the slowdown in economic activity and the rise in interest rates, in 2023 and 2024 projected in our risk scenario, the budget deficit amounts to $42.9 billion in 2023-2024 (1 .5% of GDP) and 36.5 billion in 2024-2025 (1.3% of GDP)”, also assessed the PBO.
This scenario represents a warning for politicians, argued the parliamentary budget officer, Yves Giroux.
“The scenario in today’s report is just one of many. I emphasize that it is not a forecast – it only shows one of the possible outcomes of the situation. Policymakers and international institutions have expressed concerns regarding excessive monetary policy tightening and today’s report assesses some of the potential economic and fiscal consequences,” he explained.
Note that the key rate is currently set at 3.75%, following a half-point increase on October 26. The next revision is expected on December 7.
