Economists warn Trudeau and his cabinet that the economy is set to 'slow significantly'

On the second day of the federal cabinet retreat, Prime Minister Justin Trudeau and his ministers heard from a trio of economists who came bearing grim news about Canada's economic outlook.

The economy is expected to weaken considerably, unemployment will tick up and inflationary pressures may not ease as quickly as hoped, the economists — Kevin Milligan of the University of British Columbia, Carolyn Wilkins of Princeton University and Anil Arora of Statistics Canada — told a morning session of cabinet.

"There are some serious risks for the next year," Milligan told reporters after meeting with Trudeau and other ministers.

"The most likely scenario is that we hit a soft spot. We ought to be aware of those short-run challenges."

Milligan said "policymakers should keep that in mind" before they commit to any major new expenditures — spending that could blow a big hole through the federal budget at a time when the economy is shaky.

Ottawa is considering some new spending, including a sizeable increase to the Canada Health Transfer (CHT) to help prop up a health-care system that is facing a litany of challenges.

As part of the NDP-Liberal supply and confidence agreement, the government also has agreed to stand up some sort of national pharmacare program by year's end — a policy that likely would cost the federal treasury billions of dollars.

"I would say we can expect the economy to slow significantly, the unemployment rate will rise. Whether or not we have a hard landing is something no one really knows but I wouldn't rule it out in any good plan," said Wilkins.

A "hard landing" means a marked economic slowdown or sharp downturn following a period of rapid growth. Policymakers and central bankers have been trying to orchestrate a "soft landing," a cyclical slowdown in economic growth that avoids a recession.

If unemployment spikes, however, that could actually alleviate inflation, Wilkins said.

With the job market so tight, wages have grown considerably — which in turn are pushing up prices.

If there's some slack in employment, that might put some downward pressure on the cost of services, Wilkins said. That could help the inflation picture overall, as higher service costs have proven to be "stickier" than the price of hard goods, she added.

A slumping economy could weaken Ottawa's fiscal health, further pushing up the multi-billion dollar deficit and piling on more debt. The national debt increased from $628.9 billion in 2015 to $1.1 trillion in 2022.

An ambitious stimulus package to prop up a faltering economy could, in turn, juice inflation, which is already at a level not seen in decades.