Report

Risk Scenario Analysis — November 2022

Nov 10, 2022

This report provides a risk scenario analysis to help parliamentarians gauge potential economic and fiscal implications of central banks over-tightening monetary policy. The scenario is not a most-likely forecast. It is an illustrative scenario of one possible outcome.

Highlights

Our risk scenario assumes that the U.S. Federal Reserve and the Bank of Canada will continue to rapidly raise their policy interest rates to 5.25 per cent and 5.0 per cent, respectively, in early 2023 (100 basis points above our October outlook). We assume that the Federal Reserve and Bank of Canada will begin to lower their policy rates in early 2024.
With the over-tightening of monetary policy, real GDP in Canada begins to contract in the fourth quarter of 2022 and declines further over the course of 2023 in our risk scenario. Annual real GDP growth in 2023 and 2024 is -0.3 per cent and 1.3 per cent, respectively, which is 1.5 and 1.0 percentage points lower compared to our October outlook.
Under our risk scenario, employment growth essentially stalls in late 2022 and over the course of 2023. Employment falls below levels projected in our October outlook, resulting in a loss of 177,000 (net) jobs by the end of 2024. The unemployment rate rises to 6.2 per cent in early 2024 in our risk scenario, which is 0.5 percentage points above our October outlook.
Due to weaker economic activity and higher interest rates in 2023 and 2024 under our risk scenario, the budgetary deficit reaches $42.9 billion in 2023-24 (1.5 per cent of GDP) and $36.5 billion in 2024-25 (1.3 per cent of GDP). Compared to our October outlook, the budgetary deficit is $15.6 billion higher per year, on average, over 2023-24 to 2027-28.
Under our risk scenario, the federal debt-to-GDP ratio increases to 43.2 per cent of GDP in 2023-24 and remains elevated before gradually falling to 39.2 per cent in 2027-28. The debt service ratio (that is public debt charges relative to tax revenues) reaches 14.3 per cent in 2024-25 and then declines to 12.0 per cent in 2027-28.