Canada

'Weakened' economic outlook forecast for Canada

Decreased demand for Canadian exports, in part due to the European debt crisis, has "weakened significantly" the outlook for the Canadian economy, according to a new report from the Organization for Economic Co-operation and Development.

Decreased demand for Canadian exports, in part due to the European debt crisis, has "weakened significantly" the outlook for the Canadian economy, according to a new report from the Organization for Economic Co-operation and Development.

The twice-a-year-report from the Paris based institution says economic activity has "slowed considerably" as a result of weakening external demand and moderating household spending.

"With greater financial turmoil overseas and the weak U.S economy, that's starting to get transmitted  to the Canadian economy through weaker exports," OECD economist Calista Cheung told CBC News.

Economic activity has slowed considerably as a result of weakening external demand for exports, weakening the economic outlook for Canada. (Andrew Vaughan/Canadian Press)

The high level of debt carried by Canadian households — 150 per cent of disposable income — is also affecting the economy and eroding consumer confidence, which has "deteriorated since the beginning of the year," according to the report.

"Consumers have therefore pared back borrowing to its slowest pace since the early 1990s," the report said.

Recently, both the International Monetary Fund and the Economist magazine have flagged record levels of household indebtedness as risks to the Canadian economy.

The high Canadian dollar is also limiting growth in the export sector, the report says.

But Cheung said Canada is still "holding out quite a bit better" than other OECD countries, especially compared to the U.S. and many European countries.

Canada's GDP is forecast to rise slightly in 2012 by 1.9 per cent and 2.5 per cent in 2013.

Bank of Montreal economist Douglas Porter agreed that Canada's fate rests with Europe. He notes that even the United States, which is regarded as struggling, is still reporting relatively healthy economic numbers this fall.

"Frankly that's about the only risk I can identify out there that's serious and significant enough to possibly push North America into another recession," he told The Canadian Press

But he said the OECD's warning about household debt is actually an indication of how strong Canada's domestic economy is in the face of the global storm.

"If that's the only flaw outside bodies can pick away at, it shows the relative robustness of our economy."

The report recommends a number of reforms, which "would become essential to raise growth," calls on the Bank of Canada to stay on hold until 2013. It calls for further interest rate cuts only if the downside risks materialize.

It also called on the federal government to move towards a "rules-based system" when it determines transfers to provincial governments. These rules, like balance budget amendments, would be legislated.

Cheung cited, for example, the health care transfer to provinces, which she said seems to be an arbitrary amount.

"An example of a rule could be having health transfers grow at the same rate as nominal GDP. What we've seen is health spending really ramp up over the last several years and it's exceeded the nominal growth rate of GDP and that's not a sustainable situation," Cheung said.

"It would be helpful to keep provincial budgets, to give it more sustainability and predictability to implement some sort of rules or rule-based system."

As well, the report said the provinces should create "fiscal councils" something akin to the federal parliamentary budget officer.

Canada should also shift toward a "growth friendly tax mix" meaning, for example, a possible hike in the GST while lowering income tax.

"There's definitely scope for [the GST] to be raised. Not to say it should be raised in isolation. But there could be some rebalancing if [the government] is considering revenue neutral measures."

With files from The Canadian Press