Canadian Treasurer

July 21, 2011

Government, consumer belt tightening to squeeze economic growth

OTTAWA -- Fiscal restraint by Canadian governments—and households—will curb national economic growth this year, according to The Conference Board of Canada's  Canadian Outlook - Summer 2011. Real GDP growth is expected to slow to 2.5 per cent in 2011, down from 3.2 per cent last year.

External risks to the Canadian outlook remain unusually high, largely due to the tepid U.S. recovery and its mounting fiscal burden. The forecast implicitly assumes that the United States will be able to finance higher debt loads and will not default. But this issue adds to the uncertainty. Moreover, continued concerns over European debt pose further risk to global financial stability.

"While consumer spending was partly responsible for the revival in economic growth last year, Canadian households now face headwinds that will slow the pace of spending this year," said   Pedro Antunes, Director, National and Provincial Forecast. "In addition, governments are turning their attention to balancing their books now that the private sector recovery is more firmly entrenched."

Canadian households have tightened their purse strings—effectively freezing spending in the first quarter of this year—over concerns of slowing employment growth, high food and energy prices, and rising interest rates in the horizon. Overall, real consumer spending is forecast to grow by 2.2 per cent in 2011, down from the unsustainable pace of 3.3 per cent in 2010. Higher wage gains next year should help lift real after-tax income and household spending in 2012.

The public sector's contribution to economic growth will brake sharply in 2011 as stimulus spending comes to an end. The federal government reaffirmed its plan to limit average annual spending growth to just 1.7 per cent per year over the next five years. The provinces, meanwhile, are proposing to limit their overall expenditure growth to an average of 3.5 per cent per year over the next three years.

A couple of bright spots in the outlook are business investment and merchandise exports. Real business investment in plant and equipment is expected to post double-digit growth (12.9 per cent) in 2011, thanks to a strong Canadian dollar, better access to credit, low financing rates, and improved optimism among business leaders.

Canadian export volumes have also rallied recently. The rebound in U.S. vehicle sales has lifted Canadian auto and parts production and exports. Supply chain disruptions linked to the Japanese earthquake and tsunami in March are expected to be temporary, largely affecting auto production in the second and third quarters of this year. However, if Japanese production is halted longer than expected, the negative impact on Canada's auto manufacturing sector could be prolonged.



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