The Organization for Economic Co-operation and Development (OECD) has come out with a new and decidedly pessimistic outlook on the Canadian economy. It doesn't, at first glance, tell us much that we don't already know. The question, though, is how much attention we should pay to the OECD's bottom line on Canada's growth prospects.
On Tuesday, the influential Paris-based economic umbrella group for the developed world issued its twice-annual update of the outlook for its 31-country membership. In the report, the group slashed its overall GDP growth target for the OECD in 2013 to a thin 1.4 per cent from its previous forecast six months ago of 2.2 per cent. It also lowered its Canadian GDP growth projections for next year to 1.8 per cent from 2.6 per cent.
The OECD's analysis of Canada's economy doesn't really cover much new ground; that's inevitable when you only issue economic outlooks twice a year. The key elements – that Canada's growth is slowing, that the housing market is deteriorating, that international trade is being hurt by a weakening global economy – have been evident in Canada's monthly economic indicators for some time.
But when the OECD adds up the factors to reach its bottom-line GDP projections for Canada, it comes up with numbers that are conspicuously smaller than the ones we've been seeing elsewhere. The consensus of private-sector economists' forecasts calls for 2013 growth of 2 per cent, two-tenths higher than the OECD projection; the Canadian government used this consensus figure in its latest fiscal update, issued just two weeks ago. The Bank of Canada's most recent 2013 growth assumption, published last month, was even stronger, at 2.3 per cent.
So, the question is whether the OECD has a better mathematical handle than the Bank of Canada, the federal government and private-sector economists on what current indicators imply for growth projections.
The organization's track record on calling Canada's growth has been mixed. Over the past couple of years, its late-year projections for the following year's Canadian growth have been very close to the mark. However, when you look back over the recession and subsequent recovery of 2007-2010, the OECD's forecasts bore little resemblance to the actual growth numbers. It drastically over-estimated growth in 2007 and 2008, drastically under-estimated the depth of the contraction in 2009, and wildly undershot the strength of the rebound in 2010.
If the OECD's outlook does prove more right than the Bank of Canada projections, that has some serious policy implications.
At 2.3 per cent, Canada's economy is probably closing the gap between its actual output and its full capacity – meaning interest-rate increases start coming into view before the end of next year, which is consistent with the Bank of Canada's indications. At 1.8 per cent, this output gap is probably widening – suggesting the Bank of Canada is more likely to be cutting interest rates next year than raising them.
David Parkinson