Canada deficit to hit C$29 billion this year, may prevent another rate cut: Reuters poll

Tue Mar 15, 2016 11:46am EDT
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By Anu Bararia and Leah Schnurr

(Reuters) - Canada will run a budget shortfall of C$28.6 billion ($21.4 billion) in the coming fiscal year, which should keep the Bank of Canada from cutting rates but will not necessarily provide a big boost to growth, a Reuters poll found.

Economists were almost evenly split over whether the deficit would lift annual growth above the central bank's 1.4 percent forecast for this year, noting it might take time for the spending to work its way into the economy.

Prime Minister Justin Trudeau's Liberal government was elected last October on a promise to run deficits for three years to help expand the economy. By contrast, the former Conservative government touted its balanced budget plans.

Finance Minister Bill Morneau, who delivers his first budget on March 22, warned last month that the deficit would be much larger than the campaign target of C$10 billion, as low commodity prices are weakening growth. Government sources have said it would not be bigger than C$30 billion.

Still, some economists said stronger growth in the United States, Canada's biggest trading partner, would have a bigger effect on the economy.

"The fiscal stimulus is unlikely to have all that much impact," said Deutsche Bank Chief Economist John Clinkard. "We expect the combination of stronger commodity prices and improving U.S. growth to do the heavy lifting."

Canada's economy is struggling with plunging prices of oil, a major export, and grew at a 0.8 percent annualized rate in the fourth quarter, much slower than the 2.3 percent in the previous period.

That slightly exceeded expectations from the Bank of Canada, which will include the budget impact in its next economic assessment due in April.   Continued...

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch