Canada said Thursday it expects further improvement in its budget balance following a surge in deficit spending during the pandemic, and plans relatively modest increases in outlays as the central bank tries to tame inflation through higher interest rates.
In its annual fall economic update, the country's finance ministry downgraded its outlook for economic growth and expects the unemployment rate to jump, as the economy exhibits signs of slowing due to elevated inflation, rising interest rates, and lower prices for homes and equities.
Like the Bank of Canada, the country's Liberal government now expects growth to stall over the next several quarters. The finance ministry's projections, covering a six-year period, also incorporate a downside scenario, in which inflation becomes more entrenched and central banks raise their policy rates more than anticipated.
Chrystia Freeland, Canada's finance minister, said a surge of spending during the pandemic - at its peak reaching about 28% of the country's gross domestic product - fueled a rapid recovery in the economy after the worst of the Covid-19 pandemic passed. Economic output and the level of employment are both higher now than prior to the pandemic, she said, adding this will help the country cushion a global economic slowdown, and at worse a recession should conditions further deteriorate.
"As the Bank of Canada fights inflation, we will not make its job harder. We are compassionate and we are also responsible," said Chrystia Freeland, the country's finance minister. "We are keeping our powder dry, " she said, of spending plans.
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