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Bank of Canada too optimistic on effect of federal spending: CIBC

The Peace Tower on Parliament Hill in Ottawa.

Sean Kilpatrick/The Canadian Press

Economists at Canadian Imperial Bank of Commerce say the Bank of Canada's forecast could be too rosy when it comes to how big a boost government spending will give to the country's economy.

"Just as we warned that the Bank was too optimistic in its initial 2012 call, its 2013 forecast also looks to be counting its government spending chickens well before they will be hatched," said CIBC chief economist Avery Shenfeld.

CIBC estimates real government spending will decline by 0.9 per cent in the 2013-14 fiscal year – pointing to a 0.2 percentage-point drag on real gross domestic product growth.

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That contrasts with the Bank of Canada's expectation of a 0.3 per cent growth boost.

"The result is that the Bank's forecast could be about 0.5 percentage points too high, enough to make the difference between growth being above potential, requiring interest rate hikes, or as in our forecast of 2 per cent growth next year, not fast enough to narrow the output gap and call for monetary tightening," said Mr. Shenfeld.

Canada's economy is strong enough to make it prudent to give up some growth in order to "right the fiscal ship," while leaving room to respond with stimulus if necessary, he added.

Although CIBC's forecast is not as bullish as the Bank of Canada's, the country's economy remains in an "enviable position" as serious concerns remain about the economic health of countries like Italy and Japan.

And in Canada, concern about fiscal restraint dragging on GDP growth is garnering less attention than fears the U.S. economy could "tumble over a fiscal cliff."

"Having started from a combined federal-provincial deficit of only a third of that stateside, there's no equivalent threat of an outright recession being induced by cuts coming from Ottawa and the provinces," said Mr. Shenfeld.

"We'll get through our fiscal drag much sooner than the U.S. with a lot less pain in total."

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