OECD slashes Canadian GDP growth forecast to 1.5% in 2015

A day afterfederal Finance Minister Joe Oliver deflected concerns over Canada's poor economic showing tostart 2015, theOrganization for Economic Co-operation and Development has slashed its growth expectations now expecting the country's gross domestic productto only expand by 1.5 per cent this year.

The Paris-based organizationof wealthy nations on Wednesdaycited the ongoing impact of cheap oil in slashing its expectations for Canada's economy.

"The recent fall in oil prices has resulted in declines in related investment and GDP," the group said.

The 1.5 per cent forecast iswell below the group's projection as recently as last November, when it was calling for 2.6 per cent growth. In March, the OECDratcheted that down to 2.2 per cent.

Two Canadian banks downgraded their outlooks for the Canadian economy in forecasts released Wednesday. RBC is projecting a 1,8 per cent growth rate with a sharp pickup later in the year, but CIBC notes the slower-than-expected U.S. economy and says Canada will achieve only 1.4 per cent growth.

At 1.5 per cent this year, the group expectsCanada's economyto expand by an amount that's less than what economists think is a healthy natural inflation rate, which is two per cent.

According to the most up-to-date official data, Canada's inflation rate is currently at around 0.8 per cent. The OECD doesn't expect that figure to tick up to the desired two per cent level until the middle of next year and that's with interest rates at current historical lows.

All things being equal, low interest rates should spur inflation because that means money is cheap, so people have a strong incentive to borrow and spend, behaviour that stimulates the economy and raises inflation.

Election looming

The experts' adjustments are also rolling in as the Octoberelection date approaches, breathing life into the always-centralpolitical debate on the economy.

Oliver told a parliamentary committee Tuesday he doesn'tanticipate a recession, typically defined as two or more consecutivequarters of economic contraction.

On Wednesday, NDP finance critic Nathan Cullen challenged Oliverin the House of Commons on theOECD'sdowngrade to its growthprojection for Canada.

"This minister refuses to take off the rose-coloured glasses andface reality," Cullen said.

Oliver responded by arguing theOECDreport confirmed thecountry's sound fiscal situation and projected the Canadian economyto grow by 2.3 per cent in 2016.

The federal Finance Department bases its forecasts on the averagepredictions of 15 private-sector economists. Liberal MP RalphGoodalecalled on the government Wednesday to table a new fiscalupdate, documents usually based on fresh economist projections.

2016 looks better

The OECDdoes haveslightly better expectations for Canada's economy over the medium term.

Thanks to an expected rebound in non-oil exports because of the lower loonie, the OECD expects 2016 will be a better year for Canada, with the economy expanding by 2.3 per cent better than the 2.1 per cent figure it had been expecting in March.

"Financial conditions remain supportive for investment overall and higher demand for non-energy exports and related capacity requirements should support investment in the medium term," the OECDsaid.

Canada isn't the only country on the OECD's gloomy-outlook list.The organizationnow expects U.S. economic growth to slow to two per cent this year from 2.4 per cent in 2014, compared to March, when it forecast an acceleration to 3.1 per cent in 2015.