The Economy of Canada - Case Study Example

The Economy of Canada (a) How successful has the Canadian Government and the Bank of Canada been in running the Canadian economy over the last 2 years (Starting from 2008 to todays date of 2009)? The economy of Canada, in 2008 and 2009, had been under the rule and governance of the conservative party. This government is not devoid of success as per its website. The aim of the government was to make its nationals’ wellbeing a first priority. The government has had to solve the current economic problems due to the global credit crunch using a variety of economic approaches. The expenditure of the government is long-run focused, aimed at making easy the lives of Canadians and these have been coupled with significant cuts in taxes. As a result magnitudes of tax have declined and the component of disposable income is vastly rising among households and savings have increased as a result. The government has catalysed saving by reducing taxes and providing non-taxable savings accounts. (conservative.ca, 2009) Fundamentally, the main objective of the monetary policy of Canada is to ensure Canadian citizen’s wellbeing. This is by enhancing an economic growth that is sustained, increasing employment levels as well as improved standards of living. From experience, monetary policy only achieves this goal by way of offering businesses and households’ confidence as far as the value of money is concerned. In 2008, October 23rd the Bank of Canada released a report on monetary policy. The report contained current financial and economic trends in line with the control of inflation is concerned. According to the report, the three main interrelated world developments are affecting the economy of Canada and resulting to the economic growth outlook more unpredictable. This is due to the world financial crisis resulting to major strains in the markets of financial instruments. Demand is prospected to continue being weak due to exports. Lower prices of goods and services will also lead to an outlook that is damp since the terms of trade for Canada are set to decline as well as a growth in domestic demand that’s moderate. Generally, the Bank of Canada predicts a real GDP growth of 0.6% in years 2008 and 2009. 2010’s is set to be 3.4%. (bankofcanada.ca, 2008) In the 2009’s monetary policy report, the Bank of Canada noted that the economic environment continues to highly unpredictable. This is due to the large negative impacts by the recession of the global economy. Emanating from this, the Canadian economy is projected to fall by 3.0% in the year 2009. Recovery is likely to occur in the fourth quarter and the projected growth in the real GDP is 2.5% in year 2010. 2011’s economic growth is set to be 4.7%. The core inflation level is predicted to fall in 2009 towards the 2% target level in 2011, while the aggregate demand and supply are set to go back to balance. (bankofcanada.ca, 2009) Many of the Canadian workers, businesses and communities are feeling the negative impacts of the slowdown in the global economy. Thus, the government of Canada came up with a plan of economic action. This was blueprint to ensure stimulation in the economic growth, protect the job market of the economy and give support to the ones that are hardest hit. The stimulus kit contains $62 billion which stands as one of the largest in the G7 economies. The plan was to be released in mid 2009. The Canadian government invested about $2.2 billion in 2006 to get a new system of science and technology. This included a huge support to the research of Canadian universities and colleges. The government especially concentrates on the research and development (R&D) in the sector of high education. Grants to schools have thus increased highly particularly to the granting councils to around $400 million. In inclusion to these funds are the research competitions to lead to the best ideas, the enhancement of advanced training and the implementation of knowledge. The granting is set to rise to approximately $2.7 billion in the years 2009-2010 in comparison to the actual expenditure of $2.2 billion in the year 2005-2006. (actionplan.gc.ca, 2009) In year 2008, economic growth fell sharply due to the effects of the global economic crisis, the badly performing demand in the auto sector, a decline in global economic prices and the US slump in housing. It is prospected that public finances are to fall and this is for the first time in ten years. Housing investment and businesses are facing difficulties due to the credit conditions in the world. The statistics provided by the CIA world fact book show various trends in the economy especially as indicated by the 2008 estimates. The purchasing power parity GDP was US$1.3 trillion as per 2008’s estimates. The real rate of growth in GDP was 0.4%, per capita GDP was US$39,100, and composition of GDP in terms of sector was 69.6% for services, 28.4% for industry and 2% for agriculture. The 2008’s estimate for labor force was 18.22 million; rate of unemployment was 6.2%. Gross fixed investment rate was 22.6% of the Canadian GDP. Revenues as per the budget stood at 594.1 billion USD and expenditures were 573.7 billion USD. Public debt stood at 63.8% of the country’s GDP. Inflation level was 2.4% (and this was as per 2009’s estimate). The discount rate of the Canadian Central Bank was 1.75%, while the growth rate in the industrial production stood at -2.8%. Exports of electricity were 55.73 billion Kilowatt hour and the imports of the same were estimated at 23.5 billion kilowatt hour. Exports of oil were 2.421 million barrels per day while imports were US$459.1 billion and share of exports to major partners were 77.7% for US, 2.7% for UK and 2.3% for Japan. Imports of Canada were USD415.2 billion and the major import partners’ share of the imports were 52.4% for US, 9.8% for China and 4.1% for Mexico. Foreign exchange reserves as well as gold were US$43.87 billion and external debt was USD762.2 billion. Foreign Direct Investment stock at home was USD433.4 billion and abroad was USD538 billion. It is of essence to note that all these estimates as well as the unspecified others from the CIA world fact book were of year 2008. (cia.gov, 2009) Though there are no full reports on the major macroeconomic indicators there are major outlooks presented by the Bank of Canada as of August 2009. As of then, the economy of Canada was projected to start growing. This is due to the impact of the economy of the US which is set to start recovering and also the economy of China is recovering and it is a major raw materials demand source of Canada. In the economy of Canada there is a sturdy performance in the domestic demand, picking up conditions in the financial system and there is an improved confidence in the businesses and the consumers. Commodity prices are becoming firmer. The expected growth in GDP is -2.3% in 2009, 3.0% in year 2010 and 3.5% in the following year. (bankofcanada.ca, 2009) (b) Describe and evaluate the main Macroeconomic Policies used by the Canadian Government over the last 2 years (Start of 2008 until todays date of 2009)? Before considering each policy separately, it is good to have a look at the Bank of Canada’s take on the same. Efforts to curb the productivity predicament of the economy are said to ought to be broad. These are with the inclusion of an open system of trading. Since the year 1991, the monetary policy of Canada has concentrated on the target of inflation that is explicit and it has been successful in the process of achieving targets for about 15 years. For the fifteen years, inflation has stood at 2%. An inflation that remains low, predictable as well as stable serves in ensuring a good economic performance. (bankofcanada.ca, 2009) On the other hand, the Canadian fiscal policy has been in use by various governments. The reason for this is the federalism in the nation of Canada and there being territorial and federal governments. These two government levels enjoy their freedom while making budgets as well as determining the levels of borrowing, taxation and expenditure. (Makarenko, 2009) A monetary policy involves an increase or decrease in the rates of interest prevailing in an economy by the central bank. To illustrate this graphically, the work of Snowdon is going to be used. The graph to illustrate this is given below; Figure 1: An illustration of a decrease in interest rates’ (real) monetary policy effects Real rate of interest R0 (Π0) MP0 R1 (Π1) MP1 IS curve Output Inflation Π0 Π1 AD Output (Snowdon, 2002 p156) On the other hand, a fiscal policy is either in the form of tax reduction/ increase in government expenditure and this translates to an expansionary fiscal policy. The other type is generally the opposite of this and it involves the increase in tax rates/ decrease in government expenditure- this is a contarctionary fiscal policy. The two can be illustrated graphically as follows: Figure2: An illustration of a contractionary fiscal policy Prices levels AD0 LRAS SRAS P0 AD1 P1 Real GDP Figure 3: An illustration of an expansionary fiscal policy Prices levels AD1 LRAS SRAS P1 AD0 P0 Real GDP (Guell, 2004 p123) If the projections of the Bank of Canada stand, total as well as the core inflation of CPI are set to resume the 2% level in the year 2011’s first half. This is said to be the point at which the Canadian economy will get back to its potential. During the 2009’s first half, the Central Bank of Canada reduced its rate of policy by 50 points of basis and this resulted to a cumulative of 350 basis points as from 2007. Following the steps of the framework of inflation- targeting, the Central Bank of Canada is set to continue a careful monitoring of the financial and economic developments so as to know the point of applying further stimulus of the monetary policy of 2% inflation. According to the Bank of Canada, a predictable, stable and low inflation is the key to financial stability as well as long-term growth in the economy. (bank-banque-canada.ca, 2009) In the first quarter of year 2009, the rate of growth in the real GDP dipped by 5.4% which reflected the biggest quarterly fall since the year 1991. Despite the fact that the economy did not suffer major shocks confronting the global economy due to the worldwide recession, it shared some since it is an exporter of manufactured goods and commodities to major economies especially the US market. The reaction to the 2008’s economic downturn by the government of Canada was a continual adherence to the basic approach since the 1990s that called for government finances that are healthy to achieve goals of the long run. This is to ensure sustainable economic development. To ensure a budget that is balanced the fiscal policy statement called for spending reduction. These are; actions to ensure low government costs, stabilisation of the public sector wages through legislation and also the initiative of costs controlling especially those to do with the equilibrium program of the federal government. As a form of fiscal policy, the government of Canada also had prior to those policies said, announced a reduction in tax levels as well as escalated levels of spending on the country’s infrastructure to stabilise the Canadian economy. (Makarenko, 2009) The prior approach by the government where it reduced taxes and increased expenditure on infrastructure is called an expansionary policy as illustrated earlier. The fiscal poly applied to counter the 2008 global recession is a contractionary policy. Work Cited: actionplan.gc.ca. Canadas Economic Action Plan. 2009. Retrieved November 11, 2009 http://www.actionplan.gc.ca/eng/feature.asp?pageId=126 bank-banque-canada.ca. Monetary Policy Report Update: January 2009. 2009. Retrieved November 11, 2009 http://www.bank-banque- canada.ca/en/mpr/pdf/2009/update220109.pdf bankofcanada.ca. Bank of Canada releases Monetary Policy Report. 2009. Retrieved November 11, 2009 http://www.bankofcanada.ca/en/press/2009/pr230409.html bankofcanada.ca. Bank of Canada releases Monetary Policy Report. 2008. Retrieved November 11, 2009 http://www.bankofcanada.ca/en/press/2008/pr08-22.html bankofcanada.ca. The Canadian Economy Beyond the Recession. 2009. Retrieved November 11, 2009 http://www.bankofcanada.ca/en/speeches/2009/sp250809.html cia.gov. Economy - overview. 2009. Retrieved November 11, 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/ca.html conservative.ca. A New Party. A Proud Tradition. 2009. Retrieved November 11, 2009 http://www.conservative.ca/EN/4689/ Guell, Robert C. Issues in Economics Today. McGraw Hill Professional. Edition 2 illustrated, 2004. Makarenko, Jay. Early Fiscal Responses to the Global Recession. 2009. Retrieved November 11, 2009 http://www.mapleleafweb.com/Features/Federal-Fiscal-Policy-Canada-History- Operation-And-Trends-Global-Recession Snowdon, Brian. Conversations on Growth, Stability and Trade: An Historical Perspective. Edward Elgar Publishing. Edition illustrated, 2002. Read More