OECD reduces GDP growth forecast for Canada

The Organization for Economic Co-operation and Development has lowered its forecast for growth in Canada and also globally as new investment remains sluggish, unemployment high, and consumers reluctant to spend.

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The OECD gave the global economy just a B-minus in its report on the global economy released just today. Although OECD chief economist Catherine Mann predicted a global growth rate of 3.8 per cent by 2016 this would still be below the average growth rate before the 2008 financial crisis. The OECD represents 34 developed countries.

The growth rate for Canada this year has been downgraded from 2.2 per cent just this March to 1.5 per cent now. Last November the OECD forecast Canadian growth at 2.5 per cent. With this weaker growth rate, the OECD now predicts that the Bank of Canada will not raise interest rates until early next year rather than the middle of this year as it had earlier predicted. The high personal debt of Canadians could depress consumption and also lead to a decline in purchase of houses resulting in lower investment in the housing area.

While the lower Canadian dollar should stimulate exports, the slowdown in Chinese and U.S. economic growth may lead to lower demand. If oil prices slump again, the situation would be even worse. If oil prices rise and U.S. and Chinese growth accelerates, this will have a positive effect on Canadian growth. The performance of the U.S. economy in the first quarter of this year was dismal as it contracted at an annual rate of 0.7 per cent.

Douglas Porter chief economist at the Bank of Montreal(BMO) remarked that growth was so sluggish people still talked of a "recovery" when we have been expanding for some time since the Great Recession. He said: “I guess technically we are long into the ’expansion’ phase and really shouldn’t be calling it a ’recovery’ any more. However, I suspect most people still feel like we’re still recovering from the financial crisis and its aftermath.”Porter noted unemployment in Canada remained near 7 per cent and many young people could not find jobs. Statistics Canada reported the Canadian economy contracted at an annual rate of 0.6 per cent last quarter. The BMO cut its forecast for growth this year to 1.5 percent, matching that of the OECD. With the exception of recession years. this would be the slowest rate of Canadian growth in 30 years. Porter said in a report: “At the start of 2015, the overarching view on the Canadian growth outlook was that it faced one big negative (lower oil prices), and one big positive (stronger U.S. growth), which were supposed to roughly offset each other. Fully 40 per cent into the year and we have certainly seen the negative at work (business investment plunged 15.5 per cent in Q1), while we are still waiting for the positive to kick in (export volumes have been down over the past two quarters).”

The Royal Bank of Canada(RBC) was slightly more optimistic on Canadian economic growth compared to the OECD and BMO. RBC predicted that the Canadian economy will grow by 1.8 per cent this year and 2.6 per cent next year. However, the bank predicted that investment would be weak particularly in the energy area. Energy companies are slated to slash spending by almost 30 per cent this year. Other sectors may take up some of the slack with exports on the rise due to the weaker Canadian dollar making Canadian goods cheaper in many markets, particularly the U.S.