Economic Forecast Predicts Stormy Skies

Tuesday, February 2, 2016
Chief Economist Commentary

Odd weather patterns generated by El Nino. Turmoil in the Chinese stock market. The virtual collapse of OPEC and the melt down in oil prices. The world has been an unsettled place at the beginning of 2016.

In Canada, economic performance has slowed, with growth for 2016 now forecast at about 1.2%, down from the previous decade’s average of 2.2%. As a result of global pressures the Canadian dollar has fallen sharply relative to the U.S. While this should stimulate export growth and dampen imports it may also provide some stimulus to inflation. Interest rates remain at near historic lows, but inflationary pressure could lead to some upward movement, leading to some suggestions of an impending correction in the housing market. 

What does this all mean for the charitable sector?

Reduced GDP growth will impact charities’ revenues. About 7% of charitable sector revenue comes from individual donors, donations that tend to be a very stable proportion of GDP – as GDP growth slows so too will donations. Another 35% or so of revenue for the charitable sector comes from earned income – sales or goods and services, memberships and the like. These revenues depend largely on disposable incomes and can also be expected to grow more slowly with reduced economic growth. Finally, a crucial 50% of charities revenues come from governments, largely provincial. As GDP declines tax revenues to governments do the same, reducing their ability to finance programs and fund charities. Governments can, of course, deficit finance but deficits are increasing and governments may be reluctant to go much further into debt.

While growth in revenue to charities will slow, demand for the services charities provide will continue to increase and even accelerate. The need for these services is driven as much by demographics as it is economics. The population will continue to age, continue to become more diverse and accelerate demands for the sort of social services charities specialize in regardless of the robustness or weakness of economic activity. All the while, slower growth will increase economic hardship, raising demands on charities dealing with issues such as hunger and homelessness and the general ravages of unemployment. 

This is an example of what economists call a countercyclical sector – when economic growth slows, demand for its services increases, creating a gap between between expectations and capacity. Just when the demand for charities grows the fastest, the revenues that sustain the sector will be under the most pressure. 

This is not a short-term phenomenon. Lower economic growth is expected to be a long-term reality, the demands on charities driven by demography and slower economic growth will continue to accelerate and the outlook is for a long term struggle with financial sustainability. This is a challenge that will require a profound rethinking of the relationship between charities, governments and donors if we are to sustain the just and caring society that Canadians value so highly. 

 

About the Author

As the Chief Economist for Canada’s Charitable and Nonprofit Sector, Brian Emmett is tasked with measuring the impact of the sector and bringing economic issues facing charities and nonprofits to the forefront of public policy decision makers. Mr. Emmett is an economics graduate of the University of Western Ontario and the University of Essex in England, and has enjoyed a long and distinguished public service career. He was Canada’s first Commissioner of the Environment and Sustainable Development in the late 1990s and worked extensively on Canada’s Green Plan. He also served as Vice-President of the Canadian International Development Agency (CIDA) in the early 2000s and has been an Assistant Deputy Minister in a number of federal government departments.

The office of the Chief Economist for Canada’s Charitable and Nonprofit Sector is made possible through funding received by The Muttart Foundation, Ontario Trillium Foundation – an agency of the Government of Ontario, Vancouver Foundation, an anonymous donor, and the PricewaterhouseCoopers Canada Foundation.

 

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