Question Period Note: OECD Economic Outlook – June 2023

The Organisation for Economic Co-operation and Development (OECD) has released its June 2023 Economic Outlook.

• The OECD expects the global economy to slow in 2023.

• There is a great deal of uncertainty in the global outlook as the world economy is facing many headwinds, notably with high inflation and central banks maintaining high interest rates.

• Canada is not immune to the challenges that economies around the world are facing.

• Canada is faring better than most other G7 countries in these uncertain times. The OECD projects that Canada will have the strongest economic growth in the G7 on average in 2023 and 2024.

• The OECD’s latest projections also show that Canada is expected to maintain its position as the country with the smallest general government deficit as a share of GDP among G7 countries, and still by far the lowest general government net debt as a share of GDP in the G7.

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• Global Outlook: Global economic prospects have begun to improve, but growth will be modest over the next two years. The OECD projects the global economy to expand by 2.7% in 2023 (0.1 p.p. above March 2023 Interim Assessment), and 2.9% in 2024 (no change), both below long-run trend rates. The slightly better outlook reflects improving consumer and business sentiment, and a decline in energy and food prices, but the OECD warns core inflation is persistent and that elevated interest rates will keep risks high.

• Regional Outlook: In the euro area, GDP growth is still expected to slow to 0.9% in 2023 (+0.1 p.p.), before growing 1.5% in 2024 (no change) with support from lower energy prices. For China, the OECD projects real GDP growth of 5.4% in 2023 (+0.1 p.p.) and 5.1% in 2024 (+0.2 p.p.). For the U.S., restrictive monetary policy will keep growth below potential, at 1.6% in 2023 (+0.1 p.p.) and at 1.0% in 2024 (+0.1 p.p.).

• Canadian Economic Outlook: The OECD increased its growth outlook for Canada for this year to 1.4% (up 0.3 p.p. from March). Growth is expected to remain subdued at 1.4% in 2024 (unchanged). The OECD expects the Canadian economy to see the fastest rate of growth among the G7 on average in 2023 and 2024 (2nd highest in the G7 for 2023, and 1st in 2024).

• Canadian Fiscal Outlook: Canada’s general government deficit is projected to narrow to 0.4% in 2023 and 0.3% in 2024, the lowest in the G7. Canada is expected to achieve the fastest pace of deficit reduction in the G7 from 2020 to 2023. Canada’s net debt-to-GDP ratio has declined markedly since its pandemic peak and the OECD expects it to remain largely unchanged this year and next. Moreover, the IMF expects the ratio to remain by far the lowest among G7 countries.

• Inflation Developments: Although core inflation remains elevated with higher margins in some sectors and cost pressures from tight labour markets, the OECD expects that headline inflation will gradually subside over 2023 and 2024 with easing energy and food prices. Among G20 countries, the OECD projects headline inflation to fall to 6.1% in 2023 and 4.7% in 2024 – still above targets.

• Risks: The OECD warned that the global outlook is fragile and that risks remain tilted to the downside. The uncertain scale and duration of monetary policy tightening could be extended should cost pressures continue. Further increases in food and energy prices remains a risk. Tightened financial conditions could lead to widespread financial stress with implications for households and businesses.

• Policy Recommendations: The OECD states that several quarters of positive real interest rates and below-trend growth are necessary to achieve sustained disinflation. Central banks must remain responsive to new developments, given the uncertainty with which monetary policy changes take effect, and potential for financial market stress. On the fiscal side, debt sustainability and rebuilding fiscal space is essential to meet future policy priorities and respond effectively to future shocks. Fiscal support to mitigate the impact of higher prices should become targeted to vulnerable households, which would help to limit aggregate demand pressures on inflation.