The Economic Meltdown of Canada - Essay Example

?Macroeconomic Performance of Canada in the Recent Crisis Macroeconomic Performance of Canada in the Recent Crisis Different countries performed differently in their economies during the 2006 and 2011 global financial crisis. Some counties were never affected badly while other faced immense macroeconomic crisis. For instance, the economic growth of China was never affected and its GDP never sunk below 6 percent. However, some countries including Australia was worst affected especially in its first quarter where it registered no growth. Additionally, economies including Mexico, United Kingdom, and Japan were adversely affected with their annualized GDP contracting to between 5 and 10 percent per quarter and this lasted between five and seven quarter consecutively (Gnos and Rochon, 2011; Pg. 72). Nonetheless, some countries’ economies never suffered the global crisis and the escape was pegged on different macroeconomic policies among other governmental mechanisms that such countries had put in place following previous crises. Canada is among the nations that weathered from the recent global economic crisis. Notably, this essay aims at determining facts that made Canada to evade the economic meltdown facilitated by the recent economic crisis. Introduction Canada never suffered the 2008 – 2009 global economic crises and this was reflected in its domestic spending and its continued economic growth despite the global or international turbulence that affected many economies including other major economies including the United States (Gnos and Rochon, 2011; Pg. 91). It is noted that several factors led to the stabilization of the Canadian economy amid stemming from euro zone settling sovereign debt crisis. For instance, the Canadian federal government had fiscal plans that were made visible to market. These plans were credible and they favored low borrowing costs. Moreover, during this period Canada had a sound and effective banking system that supported this economy during this time. It should be noted that the crisis never led to bailout of any taxpayer during the 2008 – 2009 global economic crisis. It is also recorded that emerging economies had shifted their purchasing power to commodity exporter including Canada (Gnos and Rochon, 2011; Pg. 51). This was conducted through stronger currencies and higher export prices thereby strengthening the Canada’s economy. Notably, the uncertainty due to global risk and economic situation usually drag financial market into a more confidence business thereby improving the inverters confidence (Mishkin, 2007). These situations led to prolonged low interest rates that were likely to push mortgage debts and prices of houses higher from what was considered already elevated levels for, most likely, the large cities. Canada always has policy credibility and strong institutions; however, for many years, it has pegged its economic growth mainly on capital inputs and increasing labor. Nonetheless, growth in its multi factor productivity (MFP) has declined and become weak within the past decade. Therefore, the Canadian macroeconomic development embarked on business and research development especially with the aim of developing the patently poor economic sectors. Some of the areas that help in stabilizing the macroeconomic sectors in Canada thereby helping it through the global crisis were its boost of innovative sectors that helped it to raise it MFP growth that was needed to help in sustaining then rising living standards particularly with aging population (Mishkin, 2007). Macroeconomic Development It is worth noting that the Canadian economy recovered relatively quickly from the 2008 – 2009 global economic crises. Notably, its recovery was quicker and this was pegged on its fiscal stimulus and timely monetary as well as high commodity price and sound financial system. Additionally, Canada has been enjoying substance low unemployment rates especially since the peak of recession that is now nearing a long term average unemployment rates. Other factors that Canadian economy enjoyed included structured rate OECD estimates, corporate profit margin that was leveled even before recession, and real business investment. In addition, in late 2011 the economic expansion was boosted due to its soft patch experiences that were later reflected in the early 2012 (Organization for Economic Co-Operation and Development, 2012; pg. 131). These experiences largely indicated temporary factors that could have not affected the economy. Despite enjoying numerous economic boosts, the Canadian economy experience a six month stagnated employment that started in summer 2011, this situation affected or weakened the public sector. The unemployment increased thereby heightening the global financial market uncertainty particularly in relation to the European sovereign debt crisis; hence, eroding the confidence of the investors (Government of Canada, 2013). However, fairly business credit conditions and high frequency indicators helped in boosting, streamlining, and strengthening as well as driving the Canadian economy despite the global economic conditions. The tables below shows Economic indicators described in this essay Chart 2: The Consumer Price Index (Government of Canada, 2013) Chart 5: The gasoline price index (Government of Canada, 2013) Chart 6: Monthly adjusted Consumer Price Index Other than the internal success, the Canadian economy was also influenced by other external economic relations with other economies. For instance, it export merchandise to the United States helped it recover nearly 75 percent of what it lost in 2008 global crisis peak (Mishkin, 2007). Additionally, other emerging economies had immensely surpassed their pre-crisis levels; thus, their economic interaction of the Canadian economy helped in boosting and recovery on the economy. Moreover, the Canadian export commodities have received robust demand from several economies that it had exported in the past decades. By the year 2000, Canada has sold export goods to the non OECD countries to a tune of over 10 percent above the merchandise export values. Notably, for the same period that Canada registered a boost in its export merchandise, United States’ shares sunk from nearly 84 to 74 percent. This means that the Canadian dollar increased in value and this has remained high for the last 10 years against the United States’ dollar thereby being stronger on the trade weighted basis (Mishkin, 2007). The strength of the Canadian dollar can be explained by the sharp increase in the prices of the commodities especially energy. Notably, these appreciations in the values of commodities have worsened the current account balance for 2 to 3 percent of GDP from the year 2000s to the recent years. Chart 7: Prices increase among major components (Government of Canada, 2013) Table 1: Energy supply and demand Energy supply and demand 2005 2006 2007 2008 2009 petajoules Primary production1 16,489.90 16,815.50 17,147.90 16,380.00 15,325.60 Exports1 8,662.20 8,898.60 9,331.00 9,301.60 7,902.00 Imports1 3,139.20 2,977.40 3,124.10 3,010.40 2,944.80 Energy availability1 11,307.10 11,176.90 11,969.10 11,179.10 10,962.90 Net supply2 9,946.10 9,879.60 10,405.80 10,160.30 9,832.00 Producer consumption 1,274.00 1,282.30 1,363.90 1,338.30 1,277.50 Non-energy use 983.7 1,044.90 1,083.70 1,012.10 902.3 Energy use, final demand 7,688.50 7,552.40 7,958.40 7,802.30 7,649.80 Total industrial 2,312.80 2,314.00 2,450.70 2,280.20 2,244.70 Total transportation 2,388.80 2,372.30 2,484.00 2,429.20 2,396.30 Agriculture 208.5 211.4 215.6 217.7 190 Residential 1,296.60 1,243.40 1,336.50 1,356.30 1,316.20 Public administration 136.1 127.6 122.1 122.5 121.8 Commercial and other institutional 1,346.10 1,283.80 1,349.70 1,396.40 1,380.80 1. Primary energy sources are coal, crude oil, natural gas, natural gas liquids, hydro and nuclear electricity. 2. Net supply of primary and secondary sources. Source: Statistics Canada, CANSIM, table 128-0009 and Catalogue no. 57-003-X. retrieved December 4, 2013, from http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/prim71-eng.htm Despite the achievement and certain constraints that characterize the Canadian economy, the Canadian economy is under continued structural adjustments particularly in relation to the relative movements of prices experienced in the early 200s. the Canadian economy did not suffer much of the global economic impact; however, its manufacturing sector especially that aligned to the export commodities shrunk sharply by the year 2011 registering only 12.6 percent as the value added in comparison to the 18.6 percent registered in the year 2000 (Gnos and Rochon, 2011; Pg. 89). Reduction in the productivity of the export manufacturing sectors has also affected it better employment sector for nearly the same period and this was averaged with a drop from 15.2 percent to 10.2 percent for the same period in the economy. This effect is relatively much higher compared to the same effect in the United States (Government of Canada, 2013). Nonetheless, both economies have been for long time correlated with developments in the exchange rates. Notably, the disparities in regional growth based on the measure of actual income per capita usually reflects the divergences in the sectorial activity including resource rich provinces such as Alberta, Newfoundland, Saskatchewan, and Labrador (Arestis, Mccombie, and Baddeley, 2006; Pg. 261). In fact, the statistics indicates that these provinces have since been enjoying the largest per capita gains in income particularly for the last past decade. However, the same is not reflected in the manufacturing center of Ontario that has been recording sluggish growth. Nonetheless, it should be noted that provinces like Alberta have achieved their strength from the increasing population in such provinces (Mishkin, 2007). These populations provide ready employment to their manufacturing sectors. Of all the provinces, Alberta has remained the most affluent province in Canada and this has been attributed to its wealth in energy. There have been strong prices for energy among other primary commodities and among other factors, these elements have continued to gradual recovery of the economic effects attributed by global crisis in Canada. Table 2: money supply and stock prices, Exchange rates, and interest rates 2008 2009 2010 2011 2012 $US per $CAN Exchange rate 0.937 0.876 0.971 1.011 1.001 % Selected interest rates Bank rate (last Wednesday of the month) 3.21 0.65 0.85 1.25 1.25 Prime business loan rate 4.73 2.4 2.6 3 3 Chartered bank conventional mortgage rate 1 year 6.7 4.02 3.49 3.52 3.17 3 years 6.87 4.57 4.3 4.28 3.9 5 years 7.06 5.63 5.61 5.37 5.27 Consumer loan rate 10.26 9.65 9.69 9.64 9.48 90-day prime corporate paper rate 3.23 0.65 0.79 1.17 1.16 $ millions Money supply Gross M1 428,569 485,746 542,928 592,794 645,656 M2 835,594 948,935 1,009,552 1,062,402 1,133,024 M3 1,258,550 1,300,881 1,368,962 1,471,639 1,580,139 1975 = 1000 Toronto Stock Exchange 300 Index, close 12,528.74 10,230.21 12,091.50 13,050.21 12,159.84 Sources: Statistics Canada, CANSIM, tables 176-0025, 176-0043, 176-0047 and 176-0064; Bank of Canada, Bank of Canada Review, Ottawa. Last modified: 2013-12-03. Retrieved December 4, 2013 from http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ07-eng.htm Monetary and Financial Market Policies There are numerous monetary and financial marketing policies that Canadian macroeconomists have been initiating and implementing towards attaining a stable market. Among these monetary policies include the short term fiscal consolidation of the economy and strong dollar policies. In supporting the economic recovery, the Canadian central bank has since maintained accommodative high stances by maintaining the policy rate at 1.0 percent (Organization for Economic Co-Operation and Development, 2012; pg. 182). These rates have been maintained at this rate since September 2010. However, such lower rates raise concerns on the financial risks especially when they are prolonged. Nonetheless, this monetary stance policy has relatively balanced strong cyclical position in the Canadian economy compared to the Europe and United States economies (International interest rate …, 1989). Additionally, the Canadian monetary policies have concentrated on housing related risks since the same may affect financial stability within the Canadian economic system. The indebtedness of the Canadian households is usually close to the average OECD (Government of Canada, 2013). Historically, it is very high thereby making the household in Canada vulnerable to a possible decrease in the prices in real estates. However, it is worth noting that the consumer credit growth has moderated since mid-year 2010. Nonetheless, the Canadian households have registered a continued increase borrowing that also leads to increased disposable incomes, a reflection that has been witnessed for the last 10 years (Arestis, Mccombie, and Baddeley, 2006; Pg. 212). Subsequently, reflecting to cheaper mortgage rates and appreciated prices of property. Additionally, the Canadian monetary policy has also provided for reforms towards supervising financial progress. According to the Canadian authorities this initiative helps in addressing vulnerabilities within the financial system while allowing active international efforts participation with the aim of strengthening macro prudential regulation (Gnos and Rochon, 2011; Pg. 177). Some of these financial monitoring bodies or authorities include Banking Supervision or the Basel Committee supervises BIS while the Financial Stability Board (FSB) supervises the monetary activities on the G20 members. This policy aims at enhancing disclosure and credibility. The other element of this policy aims at ensuring that banks absorb all forms of loser before the same burden is passed to the taxpayers. Finally, it is worth noting that other than the short term policies, the Canadian economic systems have incorporated fiscal policies that include and support long term growth. In most cases, economic downturn usually needs stimulus injection especially at the federal level in order to drive up the net and gross government debt levels (International interest rate …, 1989). Notably, between the year 2007 and 2011, the Canadian government balance depreciated for a 1.4 percent GDP surplus to a 4.5 percent GDP deficit in the year 2011. This led to an increase of government debt with figure above 20 percent pushing the GDP to 85 percent (at the end of 2011) (Government of Canada, 2013). Notably, these changes in GDP did not affect the economy of Canada to a larger extent since this economy has remained stable despite the global financial dilemmas. It is worth noting that the Canadian financial policies and its financial institutions as well as its financial policy implementing authorities are the main elements that have ensured that Canadian economy was never affected immensely by the global financial crisis (International interest rate …, 1989). Additionally, it’s the same polices and institutions that have helped in the faster recovery Canadian economy from the aftermaths of the 2006 to 2011 global financial crisis. References Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form (1989). International interest rate linkages and monetary policy. Basle, BIS. ARESTIS, P., MCCOMBIE, J. S. L., & BADDELEY, M. (2006). The new monetary policy: implications and relevance. Cheltenham, England, Edward Elgar. GNOS, C., & ROCHON, L.-P. (2011). Credit, Money and Macroeconomic Policy a Post-Keynesian Approach. Cheltenham, Edward Elgar Pub. GOVERNMENT OF CANADA. (2013). Statistics Canada. Retrieved December 4, 2013, from http://www.statcan.gc.ca/start-debut-eng.html MISHKIN, F. S. (2007). Monetary policy strategy. Cambridge, Mass. [u.a.], MIT Press. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT. (2012).OECD economic surveys: Canada 2012. Paris, France, OECD Publishing. Pg 11 - Bottom of Form Read More