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Five assumptions Flaherty’s budget makes about the economy

Finance Minister Jim Flaherty holds a press conference in the media lock-up prior to tabling the budget in Ottawa on Feb. 11, 2014.

SEAN KILPATRICK/THE CANADIAN PRESS

The federal budget, which aims to erase the deficit ahead of schedule and swing to a surplus next year, is based on a series of assumptions about how the Canadian economy will evolve.

How are those assumptions made? The budget is based on a survey conducted in December that includes the views of 14 private-sector economists, including those from the big banks, the Conference Board of Canada and the Caisse de dépôt et placement du Québec.

Its projections, therefore, tend to reflect the average view of economists. For this budget, the government's assumptions are "prudent," said Glen Hodgson, the Conference Board's chief economist, though he said Ottawa may be underestimating the strength of the U.S. economy.

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Here's a look at what's expected for the coming years:

1) Economic growth

The economy will pick up. The Conservative government expects the Canadian economy will expand 2.3 per cent this year and 2.5 per cent in 2015, accelerating from 1.7-per-cent growth last year. Those projections are slightly lower than the rates the government predicted last fall. Economists are divided on how the economy will fare this year, with growth estimates ranging from a low of 1.5 per cent by Capital Economics to a high of 2.8 per cent predicted by Deutsche Bank.

2) Employment

The jobless rate will fall. The government expects the country's unemployment rate to fall to 6.8 per cent this year and 6.6 per cent in 2015 from the current 7 per cent. That's little changed from its fall update. By 2018, it sees the jobless rate ebbing further to 6.2 per cent. That assumption will require job creation to pick up; last year, employment growth was the slowest since the recession, leaving the unemployment rate little changed.

3) Canadian dollar

Staying below par. The Canadian dollar has tumbled 9 per cent in the past year against the U.S. dollar. The government sees the loonie trading at an average of 93.7 cents this year and 95.3 cents next year. That's higher than where the loonie is today: The currency currently trades at about 90 cents, and forecasters such as TD expect the dollar to decline further.

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4) Inflation

Inflation will accelerate. Inflation has been surprisingly low over the past year, due partly to heightened competition in the retail sector. The pace of consumer price inflation is expected to pick up a bit to 1.5 per cent this year and 1.9 per cent next year, with that forecast lower than it was in the fall.

5) U.S. economy

Stronger growth seen south of the border. The U.S. economy is seen quickening to 2.7 per cent this year and 3.1 per cent next year. That forecast for the world's largest economy may be on the low side; the Conference Board sees it growing 3 per cent this year, and RBC pegs growth at 2.9 per cent. A stronger U.S. economy, along with the recent drop in the dollar, "should support Canadian exports going forward," the government said.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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