Show Transcript
Canada’s federal government released an update on the health of the country’s finances, revising up its projected deficit this year to $382 billion. Anthony Okolie speaks with Derek Burleton, Deputy Chief Economist, TD Bank, about the magnitude of the deficit and the outlook for economic recovery as momentum slows.
Print Transcript
[AUDIO LOGO]
- Derek, before we get into the federal economic update, we've got a fairly robust third-quarter GDP numbers this morning, but there are concerns about momentum going forward. What's your take on that?
- Yeah, they were strong. There's no doubt. And now, that said, the numbers did come in a little shy of expectations. I know that the big numbers, we talk 40% versus a consensus of 48%. It seems like a large gap but isn't on an annualized basis.
But there was a very deep hole. We did see a nice bounce off that. We're still down about 5% from pre-virus levels. And the equivalent in the US is about 3%. So Canada's digging itself out.
And there's no doubt some of the softening momentum we saw in October is a bit of a concern. I think we had kind of baked that into our revised estimate of the fourth quarter this year. We were looking at something around 2% annualized. I think with some of the renewed restrictions we've seen, we'll even see more of a flattening out in November and December. But it'll still get us about that 2% growth that we had forecast.
But, hey, this is not surprising. You're coming off such low levels. Momentum tends to flatten out even without restrictions as you get closer to pre-virus. But there still is a fair amount of work to do for the economy to get back fully on its feet again.
- And speaking about the state of the economy, yesterday, the Feds, of course, announced their latest deficit projections of $382 billion. That's nearly $40 billion higher than their July estimates. Did anything surprise you in the announcement?
- Yeah, not really. We knew there would be some new spending. We knew the government had signaled that it would bake in some future spending but wouldn't provide much detail. So we'll have to wait for the spring budget on that front.
The deficit for the current year at around 18% of GDP was in the ballpark of estimates. So we knew it's a sky-high number. Only the UK, I think, among the major advanced economies surpassed Canada. They've got an estimate of 19%. So Canada is there. Debt coming off lower-- relatively lower levels. So there was room to spend.
I do think this is a bit of a wedge issue with the United States. Our economy is still operating at a lower level. Whereas, in the US, the fiscal taps have really been shut off or at least slowed dramatically. Whereas, in Canada, clearly, with the ambitious near-term spending, pandemic support, some of the plans that we'll see form going forward, that should help the Canadian economy in the very near term, at least catch up. So we should see better momentum once we can get over the hump and hopefully, some vaccine flowing as we get into the early part of next year.
- So given that the debt will top $1 trillion, how will we pay for this all when the pandemic is behind us?
- Yeah, I think the hope is that we will see-- growth can really do a lot to help bring down a deficit. And the government does. It released a five-year broad projection under some various scenarios, so they bake in a number of scenarios in terms of what the economic assumptions are. They have the deficit falling back, but it's still pretty high. I mean, it's amazing. $100 billion, on average, over the next two years doesn't seem that high when you're coming off almost $400 billion. But in terms of GDP, it's still a few points, and it's still relatively elevated.
But I think, you know, we just need more meat behind the spending, because there's spending you can apply that can create future growth. If child care is improved, more people in the workforce, that can help your potential growth. So I think more important than quantity is quality of spending, that we can get some payoff in terms of future growth. That'll help the deficit.
At the end of the day, I think, we'll probably be looking at some form of restraint down the road, not something I'd expect in the next year or two. But once the economy gets back, they're going to have to curb areas of non-priority spending, and that'll be a job, particularly for a liberal government. So that'll be the big job for the future.
- And what impact do you think the deficit will have on the loonie going forward?
- Yeah, these days, currency markets are really giving a pass to any kind of big deficits. The fact of the matter, with interest rates remaining low, the debt is still very affordable. In fact, a lot of-- you know, with the OECD, the IMF, a lot of the big international groups are actually encouraging governments to spend, to take advantage of low rates, to spend on green infrastructure, and the like. The liberal government seems to be following that recipe. I guess I do get a bit worried down the road if interest rates don't only modestly move higher, as we anticipate in our base, and that's a risk all governments are going to face.
So that said, I think Canada is not alone. Governments are running big fiscal deficits. Their debt burdens are relatively higher than Canada's. The loonie really didn't respond to the update yesterday. I think that's kind of signaling there are other fish to fry at the moment.
- Derek, thank you very much for your time.
- Thank you. Appreciate it.
[AUDIO LOGO]
[MUSIC PLAYING]
- Derek, before we get into the federal economic update, we've got a fairly robust third-quarter GDP numbers this morning, but there are concerns about momentum going forward. What's your take on that?
- Yeah, they were strong. There's no doubt. And now, that said, the numbers did come in a little shy of expectations. I know that the big numbers, we talk 40% versus a consensus of 48%. It seems like a large gap but isn't on an annualized basis.
But there was a very deep hole. We did see a nice bounce off that. We're still down about 5% from pre-virus levels. And the equivalent in the US is about 3%. So Canada's digging itself out.
And there's no doubt some of the softening momentum we saw in October is a bit of a concern. I think we had kind of baked that into our revised estimate of the fourth quarter this year. We were looking at something around 2% annualized. I think with some of the renewed restrictions we've seen, we'll even see more of a flattening out in November and December. But it'll still get us about that 2% growth that we had forecast.
But, hey, this is not surprising. You're coming off such low levels. Momentum tends to flatten out even without restrictions as you get closer to pre-virus. But there still is a fair amount of work to do for the economy to get back fully on its feet again.
- And speaking about the state of the economy, yesterday, the Feds, of course, announced their latest deficit projections of $382 billion. That's nearly $40 billion higher than their July estimates. Did anything surprise you in the announcement?
- Yeah, not really. We knew there would be some new spending. We knew the government had signaled that it would bake in some future spending but wouldn't provide much detail. So we'll have to wait for the spring budget on that front.
The deficit for the current year at around 18% of GDP was in the ballpark of estimates. So we knew it's a sky-high number. Only the UK, I think, among the major advanced economies surpassed Canada. They've got an estimate of 19%. So Canada is there. Debt coming off lower-- relatively lower levels. So there was room to spend.
I do think this is a bit of a wedge issue with the United States. Our economy is still operating at a lower level. Whereas, in the US, the fiscal taps have really been shut off or at least slowed dramatically. Whereas, in Canada, clearly, with the ambitious near-term spending, pandemic support, some of the plans that we'll see form going forward, that should help the Canadian economy in the very near term, at least catch up. So we should see better momentum once we can get over the hump and hopefully, some vaccine flowing as we get into the early part of next year.
- So given that the debt will top $1 trillion, how will we pay for this all when the pandemic is behind us?
- Yeah, I think the hope is that we will see-- growth can really do a lot to help bring down a deficit. And the government does. It released a five-year broad projection under some various scenarios, so they bake in a number of scenarios in terms of what the economic assumptions are. They have the deficit falling back, but it's still pretty high. I mean, it's amazing. $100 billion, on average, over the next two years doesn't seem that high when you're coming off almost $400 billion. But in terms of GDP, it's still a few points, and it's still relatively elevated.
But I think, you know, we just need more meat behind the spending, because there's spending you can apply that can create future growth. If child care is improved, more people in the workforce, that can help your potential growth. So I think more important than quantity is quality of spending, that we can get some payoff in terms of future growth. That'll help the deficit.
At the end of the day, I think, we'll probably be looking at some form of restraint down the road, not something I'd expect in the next year or two. But once the economy gets back, they're going to have to curb areas of non-priority spending, and that'll be a job, particularly for a liberal government. So that'll be the big job for the future.
- And what impact do you think the deficit will have on the loonie going forward?
- Yeah, these days, currency markets are really giving a pass to any kind of big deficits. The fact of the matter, with interest rates remaining low, the debt is still very affordable. In fact, a lot of-- you know, with the OECD, the IMF, a lot of the big international groups are actually encouraging governments to spend, to take advantage of low rates, to spend on green infrastructure, and the like. The liberal government seems to be following that recipe. I guess I do get a bit worried down the road if interest rates don't only modestly move higher, as we anticipate in our base, and that's a risk all governments are going to face.
So that said, I think Canada is not alone. Governments are running big fiscal deficits. Their debt burdens are relatively higher than Canada's. The loonie really didn't respond to the update yesterday. I think that's kind of signaling there are other fish to fry at the moment.
- Derek, thank you very much for your time.
- Thank you. Appreciate it.
[AUDIO LOGO]
[MUSIC PLAYING]
