The Conference Board of Canada has lowered its outlook for economic activity this year.
The Conference Board of Canada and the Bank of Canada must use the same models: Their outlooks for the Canadian economy are almost identical.
Both released new projections Wednesday and both foresee tepid economic growth this year and next. The Conference Board's latest economic outlook predicts Canada's gross domestic product, adjusted for inflation, will expand 2.1 per cent in 2012 and 2.9 per cent in 2013.
The Bank of Canada's numbers: 2 per cent and 2.8 per cent, respectively.
Like many forecasters, the Ottawa-based Conference Board is revising down its projections because of the European debt crisis. In the autumn, the Conference Board predicted Canadian growth of 2.4 per cent.
The Conference Board is assuming global policy makers will avoid disaster. The forecast is predicated on European leaders avoiding the collapse of the euro and U.S. policy makers putting their differences aside long enough to ensure fiscal policy supports economic growth in the near term. "Obviously, there are sizable downside risks to the current outlook given the poor track record of politicians in Europe and the United States when it comes to dealing with their debt challenges," the report says.
What about Canadian policy makers?
A significant drag on Canadian growth will be the winding down of stimulus spending and the implication of austerity measures at all levels of government. The Conference Board estimates that total government spending is set to contract by 0.6 per cent in 2012, removing some $2-billion on a net basis from the economy. Governments' contribution to growth will remain negative in 2013, the organization predicts. That would be the first time since the mid-1990s that government spending was a net negative for the economy.
The Conference Board isn't opposed to government constraint, especially at the provincial level. "Most provinces are facing a momentous challenge," the report says. "They must balance their books before rising debt levels limit their ability to fund social programs. And they must do so in an environment of slowing revenue growth and increasing demand from an aging population on their largest spending category – public health care."
If things go bad, the federal government has indicated that it's prepared to reconsider stimulus. The Conference Board report suggests the Prime Minister has the fiscal space to do so. The report notes that Finance Minister Jim Flaherty's forecast for GDP growth is extremely conservative.
"Should economic growth come in closer to the Conference Board's current projections, the books could still be balanced earlier than expected," the report says.
Alternatively, if things go off the rails, it would be the federal government that would have the means to come to the rescue.