Actually, Mr. Chairman, can I make four brief comments to open, because we've had a chance to hear from Mr. Lee, and I thought I'd say a couple of things about our perspective on the world.
Message number one is on the U.S. outlook. We actually have not called for a U.S. recession in our forecast. If you look at the consensus forecast on Wall Street, it's about 50-50, and we're with the 50% who believe that the U.S. is going through a very tough period. If it feels bad right now, it's because it is. This is probably the worst quarter, but we don't think a recession is the most likely outcome. Our forecast for U.S. growth this year is about 2.1%, which is smack at the centre of the consensus forecast on Wall Street.
That said, I think we've probably given insufficient weight to another phenomenon, which is called “stagflation”. There I'd actually agree with what Mr. Lee said at the end of his comments, that the U.S. consumer is hugely overburdened with the combination of falling house prices, a weak equity market, very high global oil prices--and the U.S. imports about two-thirds of its oil--and heavy indebtedness. Debt is fine as long as the other side of your balance sheet is going up in value, but what's happened is that the average American is indebted up to about 130% of their income, yet their house price is now falling. That looks like a recipe, to me, for really weak recovery and weak growth for a number of years to come. There I would agree with Mr. Lee. Two years might actually be a short period. It could be three to five years of crawling along, underperformance by the U.S. consumer, which is 70% of U.S. GDP. So that's an important number.
The inflation side, unfortunately, comes from the fact that appreciating currency and high commodity prices, whether it's wheat or oil, is really feeding the underlying inflationary forces in the United States' economy. The last three months have seen inflation of almost 7% in the United States. If you look at the inflationary forces around the world, China, India, and a lot of other countries right now are unfortunately seeing a lot of stimulus in terms of prices.
So I think it's probably a fairly even bet as to whether the U.S. is facing a recession or what I would see as a much more serious problem, which is stagflation, going forward. That could last a long time. It can last into multiple years.
That's important for the Canadian outlook, and that's my second point, because it means that anybody who is selling to the U.S. consumer, any business that's really relying on exports to the U.S., is going to be in a tight position for a number of years to come. We've seen Canadian exports to the U.S. more or less flat in real terms for the last eight years. If you measure the annual growth rate, it's about 1% or less. We used to rely very heavily on sales to the U.S. as a source of stimulus. We can no longer do that. That raises some really interesting questions for our trade and economic policies going forward.
We were actually the most optimistic of all the private sector forecasters right now on our Canadian outlook. We think the Canadian economy can grow at 2.5% this year, but it will be very uneven sectorally and geographically. So the west is best--we think 3% growth or beyond is quite attainable for all four western provinces. Central Canada is very challenged because of the heavy reliance upon sales to U.S. consumers. The industrial heartland is very much challenged. I'm sure you've heard from many manufacturers that have talked about the challenges they're facing. Then Atlantic Canada is bringing up the rear a bit. We do think that growth of around 2.5% is attainable, but again, this is probably the worst quarter.
It feels like we're in a real slowdown right now because we are going through a period of slower growth, but I would point to the fact that we did have growth in the fourth quarter of last year, and the job creation numbers for January were remarkably strong. As we look at all the evidence, we again don't see quite as pessimistic a story as do some other forecasters out there.
One other thing I'll mention on our Canadian outlook, and that's the outlook for inflation. We see the inflation numbers coming way off. It's actually the complete reverse of what we're seeing in the United States. We're the beneficiary of high commodity prices as a domestic economy and we have an appreciating currency, so our forecast for Canadian inflation for this year is around 1.5%. That leaves a lot of latitude for the Bank of Canada to gently cut rates through the course of the year. It also, however, means that nominal income growth--and that's what governments tax--is going to be a little slower than what we or the Department of Finance foresaw last fall. That may well create a challenge for the federal government in terms of going into the budget, because it means revenues will be a little bit weaker than we'd all foreseen.
Very quickly, on a third point, I just want to do a quick contrast between revenue implications on our side and what the government is saying. We haven't formally run our model that we do in terms of one of the four forecasters of record on the fiscal deficit or surplus, but my colleague Matthew Stewart has done a little back-of-the-envelope work, and our best guess for this fiscal year is a surplus of around $11.6 billion or $11.5 billion, which is pretty much the same number as Finance put out in their fiscal outlook back in October. For next year, we have pulled our forecast surplus way down to about $3.4 billion. Finance is forecasting $4.3 billion. So it's in the same ballpark, but you can see that the latitude in the budget for innovative things is getting squeezed. We have come up with more or less the same number for fiscal year 2009-10. We're now forecasting a surplus of around $3.4 billion; Finance had a number of $4.3 billion. Again, a billion dollars on a budget of $230 billion is really just noise.
So our view is very close to or aligning with that of Finance.
The last thing I'll mention, Chairman, is that we're in the midst of doing a series of papers on tax reform. It's an area where the Conference Board has not done a lot of work in the past, but I thought, as chief economist, it was important we get on the record in areas where we need to rethink the tax system on a national basis.
Members might be interested in seeing the work we've done. The first one was on cities and thinking about how to create fiscal capacity for our cities. That came out in mid-January. The second one is actually on green taxes and the use of market instruments to put a price on carbon. We published that about a month ago, and have had a fair amount of media attention.
The things we plan to put out over the course of the year will be around sales tax harmonization, where we will strongly encourage the provinces to harmonize with the GST system—which would be a real boost to productivity, particularly for small business. We're going to look at business tax reform and things like getting rid of capital taxes faster, and we will be thinking of other things we can do to improve business competitiveness. Then we'll look at individual tax reform, based upon the demographics we're facing, because we are now at a point where we argue constantly that we're facing a labour market crunch going forward and we have to think about aligning our tax system with the demographic realities in our labour market.
Thank you, Chairman.