The Current and Future State of the Canadian Economy - Essay Example

The Current and Future State of the Canadian Economy Executive Summary Canadian economy’s performance has been robust. In the last decade, Canadians enjoy extremely high living standards as compared to the rest of the world. The economy is experiencing major structural changes due to increasing commodity prices, mounting oil and gas production and the appreciation of the Canadian dollars and has demonstrated a remarkable capability to maintain its economic performance. In the near future, the main challenges for both the federal and the provincial governments will be to enhance productivity and to maintain the current economic status. Introduction Canada is a prominent member of the group of developed nations. The external manifestation of this is its membership in a variety of trade agreements like FTA (Free Trade Agreement) and NAFTA (North American Free Trade Agreement), Group of Eight (G8) etc (Howlett 1992). The unique feature of the Canadian economy which distinguishes it from the others is its synergy with the economy of USA. The Canadian economy is integrated with the US economy to such an extent that United States is responsible for over 85 % of its exports and 75 % of its imports (Howlett 1992). It is important to identify the strengths of the Canadian economy. The predominant factors of the Canadian economy are its affluence in the various natural resources, a robust manufacturing sector, a developing services sector, a responsive network of financial institutions. More importantly the services sector is responsible for employing over 75 % of the Canadian Workforce (Howlett 1992). Canada experienced a deep economic recession a couple of decades ago (1987 to 1991). The recession was characterized rising budgetary deficits, increasing unemployment, and overall disaffection with the economic policies of the government. The poor economy led to a change in the government and had political consequences like an increase in the demand for sovereignty of the Quebec province of Canada (Howlett 1992). Canada is a free market economy modeled on the USA but there is increased tolerance for state intervention in various economic policies than the United States of America. In the first decade twenty first century, Canadian economy has been developing steadily with a significant decrease in unemployment and the generation of considerable government surpluses. In the past decade the Canadian dollar has appreciated considerably in the world market (Howlett 1992). Quantifying the Canadian Economy The Gross Domestic Product (GDP) is a good indicator of the size of the economy. Gross domestic product (GDP) is a popular indicator used to estimate the value of economic activity. GDP quantifies two aspects at once over a given period of time: the total income and the total expenditure. This section will analyze the various types of expenditures which contribute to the GDP. The domestic consumption or the private consumption includes the expenditure incurred by a family on a recurring basis like food, rent, medicinal expenses etc. This is difficult to quantify (McKinsey Global Institute 1999). Next component is Capital investment, the hallmark of capital investment is that money is exchanged for either goods or services; another important hallmark is that after the exchange, there is no liability on the provider of the goods or services for repayment at a later stage (McKinsey Global Institute 1999). After having quantified the domestic and the private sector, it is essential to quantify the expenditure incurred by the government. As a rule it includes the salaries paid to the government servants and the expenses incurred by the government towards the infrastructure establishment. An important aspect to be borne in mind while estimating the GDP is that all expenditure which does not translate either into physical goods or services provided is not included into the GDP. This includes savings in banks, mutual funds, investments in stock markets etc (McKinsey Global Institute 1999). The final type of expenditure is the net exports. This is the net difference between the exports and imports of the country (World Bank 2002). The above model attempts to estimate GDP based on the expenditures, we can attempt to quantify the GDP based on the income generated by the economy. In this model, the various parameters of importance are the Gross Operating Surplus (GOS) calculated from the gross profits of the incorporated businesses, the Gross Mixed Income (GMI) which measures the gross profits of the various unincorporated businesses and finally the Compensation of Employees (COE) which measures the total compensation paid to all the workers in both the public and the private sectors. This sector also includes the contributions of the employers to the various social security schemes on behalf of their employees. The total of all these factors is an approximation of the total GDP quantified on the basis of the income model (World Bank 2002). An Overview of the Canadian Economy The preponderance of Canada’s natural resources makes it an ideal base for manufacturing industries. Uranium, gold and lead are some of the primary exports of Canada. Lumber and the allied paper pulp industry is an important component of the economy. The international market is dependent on Canada for the supply of these raw materials and in turn the volatility of the prices in the international market has a direct impact on the Canadian economy. Taking into account its considerable natural resources along with skilled labor and modern infrastructure, Canada enjoys solid economic prospects. Good economic organization has produced a series of budget surpluses from 1997. Exports are responsible for approximately 30 % of the GDP. Canada benefits from a considerable trade surplus with its major trading partner, the USA. Canada is a primary supplier of energy to the USA, linked to this are the huge oil and natural gas resources available in Canada. Canada is also primary exporter of agricultural and dairy products not only to the United States of America but also to several other markets like Europe. The ratio of the manpower and GDP involved in agriculture has dropped dramatically in the last couple of decades. In Canada manufacturing has remained in the periphery though it has never lost its importance, Due to the relatively smaller contribution of the industrial sector to the GDP, Canada was insulated to great extent from the recession in the industrial sector in the late part of 1970 and early 1980s. The most important part of the Canadian industry is its auto industry. The service sector in Canada is the engine of growth which accounts for over 60 % of its GDP, it also employs over 65% of the Canadian workforce. The Present State of the Canadian Economy The Canadian economy has been increasing at a rate of 3.6 per cent in the first quarter of 2006 (Wallace 2002), however the actual GDP growth reduced to a quarterly growth rate of approximately 2 per cent in the second quarter in 2006 and reduced to 1.7 per cent in the third quarter of 2006. The reduction of the GDP growth in the third quarter of 2006 was compounded by reduced state expenditure (Wallace 2002). The fourth quarter of 2006 will also register a reduction as net exports are likely to be a drag on growth (the fourth quarter result of 2006 has not been released by the OECD economic survey). Economic growth is varied across the country. The provinces in western part of Canada have registered consistently good growth as high prices for energy and other commodities in the international markets have translated into increased profits (Wallace 2002). In contrast the manufacturing provinces have been showing reduced performances due to the quick appreciation of the Canadian dollar in the past four years and the increasing energy expenditures have reduced the competitive edge of the manufacturing sector. The unemployment rate stands at 6.25 per cent and remains in the periphery of the lowest unemployment rate of 6.1 per cent recorded in the recent past (Wallace 2002). Western Canada has registered an impressive economic growth with approximately 250,000 jobs created in 2006. The primary inflation rate of inflation increased to 2.20 per cent in 2006 from a year ago. This inflation rate is higher than the stated goal of the Canadian government to maintain the inflation rate at 2 % (Wallace 2002). The Bank of Canada’s measure of the inflation rate keeps the most volatile components (eight components namely vegetables, fruit, fuel oil, gasoline, mortgage interest, natural gas, tobacco products and inter-city transportation) out of the consumer price index (CPI). The Future of the Canadian Economy The main disadvantage in Canada’s middle term fiscal outlook is the recession that is affecting the U.S.A. This implications of this recession in the housing sector of USA will impact Canadian economy. The various other symptoms of an economic recession like a decrease in the manufacturing activity are appearing in Canada. The synergy between the American and the Canadian markets will entail a slowdown of the Canadian economy. . With the demand for Canadian goods in the U.S.A anticipated to be lower in 2007 than the previous years, the Canadian trade will invariably face reduced activity levels. The major impact will be on the Canadian manufacturing industries. These industries focus primarily on exports which are still facing a fall in demand due to steadily appreciating Canadian dollar. However the recession is expected to end in mid 2007 in America which will fuel growth in Canada. Conclusion The Canadian economy is the amongst the largest in the worlds industrialized nations. The recent past has observed a steady shift in the economic scene from agriculture towards manufacturing industries and services. The service sector especially employs over 60% of the Canadian workforce. Canada has evolved from a country which produces and exports primarily raw materials to a country that is manufacturing and exporting finished products. Bibliography McKinsey Global Institute, Unlocking Economic Growth in Russia, 1999. World Bank, Transition – The First Ten Years, The World Bank, 2002. Howlett, Michael and M. Ramesh. Political Economy of Canada: An Introduction. Toronto: McClelland and Stewart, 1992. Wallace, Iain, A Geography of the Canadian Economy. Don Mills: Oxford University Press, 2002 Read More