Canadian Economy Would Face Spooky Scenario If Global Uncertainty Increased: BoC

OTTAWA (Reuters)  Canada’s economy would shrink by about 4.5 per cent by 2021 if a global slowdown became more pronounced because of a higher than expected degree of uncertainty, the Bank of Canada said in a scenario released on Wednesday.

The central bank made the forecast at the same time as it released its quarterly monetary policy report, in which it revised its global and domestic growth forecasts while warning the Canadian economy is not immune to global trade conflicts.

The central bank said its scenario assumed “a plausibly higher degree” of uncertainty would prompt a more pronounced global slowdown.

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This would hit the Canadian economy through several channels, the bank said. Weaker domestic and foreign demand would lead to lower trajectories for employment, wages and household income.

“As a result of all these changes, household spending, business investment and exports would be weaker and real GDP would be about 4.5 per cent lower by the end of 2021 relative to the base-case projection,” the bank said.

The Canadian dollar would depreciate by roughly 15 per cent and “play a key role” in the domestic economy’s ability to adjust to a weaker global economic outlook by helping contain adverse effects on exports and income.

The forecast assumes no new tariffs would be imposed and that monetary and fiscal policies in Canada and the rest of the world did not respond to additional economic weaknesses.

Weaker potential output associated with less business investment would negatively affect the supply side economy, the bank suggested. However, these supply effects, combined with a lower Canadian dollar, would partially mitigate the negative impact of weaker aggregate demand on inflation.

Overall, the bank estimated in its scenario, CPI inflation would be 0.7 percentage points lower than in the base case in 2021.

Global GDP would drop by 2.25 per cent by the end of 2021 while commodity prices would plunge by approximately 20-25 per cent.

In July, the Bank of Canada released a scenario projecting Canada’s economy would shrink by around 6 per cent by end-2021 if the United States increased tariffs on all imports by 25 per cent and its trading partners followed suit.

(Reporting by Kelsey Johnson, Editing by Dale Smith and David Ljunggren)