Economists warn Trudeau and his cabinet that the economy is set to 'slow significantly'

On the second day of the federal cabinet retreat, Prime Minister Justin Trudeau and his ministers heard from a trio of economists who came bearing grim news about Canada's economic outlook.

The economy is expected to weaken considerably, unemployment will tick up and inflationary pressures may not ease as quickly as hoped, the economists Kevin Milligan of the University of British Columbia, Carolyn Wilkins of Princeton University and Anil Arora ofStatistics Canada told a morning session of cabinet.

"There are some serious risks for the next year," Milligan told reporters after meeting with Trudeau and other ministers in Hamilton.

"The most likely scenario is that we hit a soft spot. We ought to be aware of those short-run challenges."

Milligan said "policymakers should keep that in mind" before theycommitto any major newexpenditures spending that could blow a bighole through the federal budget at a time when the economy is shaky.

Their commentsmarked the midpoint of the retreat, where there has beena constant presence of anti-Trudeau protesters since the prime minister's arrival. A small but loud group remainedin front of the downtown hotel most of Monday and Tuesday, where the meetings are taking place.

Tuesday evening, agroup waving flags,shouting into loudspeakers and later setting off fireworks, surrounded the restaurant where Trudeau was reportedly having dinner, promptingseveral cityblocks to be closed off.

WATCH | Warnings of a recession grow louder:

Economy tops agenda on Day 2 of Liberal cabinet retreat

1 year ago

Duration 2:30

The economy dominated the agenda on the second day of the Liberal government's strategic planning retreat. Worries about a looming recession put ministers in a tough spot when asked questions about prepared Canada really is for hard times.

Ottawa is considering some new spending, including a sizeable increase to the Canada Health Transfer (CHT) to help prop up a health-care system that is facing a litany of challenges.

As part of the NDP-Liberal supply and confidence agreement, the government also has agreed to stand up some sort of national pharmacare program by year's end a policy that likely would cost the federal treasury billions of dollars.

"I would say we can expect the economy to slow significantly, the unemployment rate will rise. Whether or not we have a hard landing is something no one really knows but I wouldn't rule it out in any good plan," saidWilkins.

A "hard landing" means a marked economic slowdown or sharp downturn following a period of rapid growth. Policymakers and central bankers have been trying to orchestrate a "soft landing," a cyclical slowdown in economic growth that avoids a recession.

If unemployment spikes, however,that couldactually alleviate inflation, Wilkins said.

With the job market so tight, wages have grown considerably which in turn are pushing up prices.

If there's some slack in employment, that might put some downward pressure on the cost of services, Wilkins said. That could help the inflation picture overall, as higher service costs have proven to be "stickier" than the price of hard goods, she added.

A slumping economy could weaken Ottawa's fiscal health,further pushing up the multi-billion dollar deficit and piling on more debt.The national debt increased from $628.9 billion in 2015 to $1.1 trillion in 2022.

An ambitious stimulus package to prop up a faltering economycould, in turn, juice inflation, which is already at a level not seen in decades.

Government prepared to do less, Freeland says

Finance Minister Chrystia Freeland said Tuesday that, with the outlook gloomy, the government must act prudently.

If tax revenues take a dive, the government will do less, she said.

"I think that's the approach governments should always take. We're very, very focused on taking the fiscally responsible approach," Freeland said.

There's also a lot of global uncertainty, Freeland said, which compels Ottawa to proceed with caution.

She pointed to China's decision to dump its "zero COVID" policy, which could lead to strong economic growth in that part of the world as restrictions are relaxed.

But runaway growth in China is a double-edged sword because itcouldpush up global energy prices as the countryconsumes more oil and gas a development that could have ramifications for other industrialized economies.

There's one budget item the government says it will deliver, despite theeconomicheadwinds: more health-care funding for the provinces and territories.

Freeland said the government is "committedto doing our share" on health and promisedto be "faithful" to the party's 2021 election platform commitments, which included a pledge to hire 7,500 doctors and nurses, improve long-term care homes, make mental health services more readily availableand hire tens of thousands of personal support workers (PSWs).

WATCH |Canada faces 'turbulent' economic times, says associate finance minister:

Canada faces 'turbulent' economic times, says associate finance minister

1 year ago

Duration 8:50

"We're going to have to weather the 2023 economic storm together," Randy Boissonnault, the associate federal finance minister, told Power & Politics on Tuesday.

MP Randy Boissonnault, Canada's associate finance minister, conceded Tuesday that it's going to be a "turbulent" year for the economy. He insisted the government still has some spending room for big priorities.

"There's a lot of uncertainty so we're going to be watching this every step of the way as we get ready for the budget," Boissonault said.

"We still have some fiscal room to be able to do things we need to do, but the fiscal room has tightened."

He said Ottawa is still prepared to do "big ticket items" in a "responsible way."

Asked whether a multi-billion dollar boost to health transfers could put Canada on shaky fiscal ground, Milligan said it's likely the money will be doled out over the long-term, meaning the budget hit will not be as pronounced in any one year.

Ottawa's forecast was too optimistic, says report

On Monday, a joint report from the Business Council of Canada and Bennett Jones warned that the fiscal forecast laid out in the last federal budget and the fall economic statementwas probably too rosy.

The report, written by former Bank of Canada governor David Dodge and former Liberal finance policy adviser Robert Asselin, said the government's forecast was based on a "plausible but optimistic" set of economic and interest-rate assumptions that are unlikely to come true.

They warn there is a "high likelihood of a more severe recession" this year and that the Liberal promises on everything from health-care funding and enhanced national defence spending to infrastructure improvements and climate change are going to cost a lot more than projected.

Boissonnault said that report is one of many the government will look to as it makes its economic forecast ahead of the next budget.

He said he thinks the fiscal reality will fall somewhere between the best- and worst-case scenarios laid out inFreeland'sfall economic statement.

That fiscal updateforecasta deficit of $36.4 billion for the 2023-24 fiscal year.There's a risk thatdeficit projection might never materialize itcould end upmuch worse.

In the November fiscal update,Freelandpresented what shecalled a"downside scenario" for growth and employment one in whicha recession results in thousands of lost jobs, fewer taxes collected, a spike in employment insurance (EI) payments, an increase indebt servicing costsand a dramatically higher deficit $49.1 billion in 2022-23.