Larger than expected interest rate hikes would spell economic contraction: PBO

OTTAWA — The parliamentary budget officer says the Canadian economy would contract slightly in 2023 if central banks raise interest rates more than anticipated.

The PBO published a report Thursday that assesses what would happen if the Bank of Canada and U.S. Federal Reserve raise interest rates by one percentage point more than anticipated.

In that scenario, the Canadian economy would contract by 0.3 per cent in 2023 and grow by 1.3 per cent in 2024.

The PBO says the unemployment rate would rise to 6.2 per cent by early 2024, half a percentage point higher than it is expecting in the baseline scenario.

Lower economic activity and higher interest rates would also mean the federal deficit would grow to $42.9 billion in the 2023-24 fiscal year and $36.5 billion in the 2024-25 fiscal year.

The PBO says this analysis represents only one of many possible scenarios that could play out in the Canadian economy.