The Canadian Economy over the Past Two Years - Report Example

The Canadian Economy over the Past Two Years (a) How successful have the Canadian government and the Bank of Canada been in running the Canadian economy over the last two years? In general, it may be said that Canada’s economy has been well run in the past two years, including the period before and during the US financial crisis and its global contagion. Canada’s economy is ranked eighth largest in the world. The country’s superior economic strength relative to other countries is evident in the fact that “Canada’s economic performance has been among the best in the OECD” (OECD, 2008). The OECD report credits Canada’s strength to the manner the country’s economic planners and policy makers took advantage of strong global growth and favourable terms of trade before the crisis. Prior to the recent financial crisis, which came to its most serious state in September 2008, the Canadian economy has been at the front of the OECD countries. For the past one and a half decades, the country experienced robustness in real GDP growth, strong employment gains, and the lowest level in unemployment rate within the past generation. Favourable effects in the terms of trade, combined with growth in real per capital output, have greatly improved the Canadian living standards. Higher commodity prices have brought rapid appreciation in the Canadian dollar to restore parity with the US dollar. This helped to discipline and stabilize wage and price setting, and to meet the officially targeted inflation rate. Price inflation in the domestic market have been held in control by the development of stronger production capacity (OECD, 2008). Canada’s real GDP declined 0.8 percent in the fourth quarter of 2008, bringing real GDP for the year to 0.5 percent. This is sharply down from the previous year’s 2.7 percent growth. Each month in the quarter, GDP grew progressively weaker, recording it steepest decline since 1991. The slow down in GDP were due to declines in exports, capital investment, and personal expenditures. Final domestic demand fell by 1.2 percent, although government current and capital expenditure rose. Production likewise fell by 2.4%, with manufacturing declining by 4.3% for the quarter (for the last six consecutive quarters, manufacturing growth rate consistently contracted). Only agriculture sustained positive growth, but in light of the government subsidies dedicated to agriculture, this is not surprising. Growth in agriculture may be due mainly to the protectionist policies of the government here, and not due to strength in the open market. In short, agriculture’s strength is unstable and, if government gives up its support, agriculture may be seen to drop likewise as with the other sectors. Imports and exports both registered their most rapid quarterly fall since 1982. Volume of imports fell more rapidly than the volume of exports, which may indicate worrisome prospects because raw materials and industrial products for business comprised much of the import decline. But even as volume fell, prices of imports rose due to a 14-percent depreciation in the value of the Canadian dollar relative to the U.S., for the quarter. (Business, 2009) As the negative effects of the US financial crisis began to spread by mid-2008, Canada’s net exports suffered a strong slump, and caused the decline in economic growth to just slightly within positive territory. The US downturn exerted, and continues to exert, a strong downward pull on Canada’s growth rate via the trade and credit channels (OECD, 2008). By the end of the third quarter of 2009, however, it appears that economic outlook has begun to turn positive. The macroeconomic forecast scenario drawn by Canada Auto Report for the fourth quarter of 2009 has categorically stated its belief that “the biggest recession since the early 1990s is in the process of ending, and the Canadian economy will return to growth in the second half of 2009” (Canada Autos Report, 2009) It also indicated that it is expecting to see a bounce back to positive territory in so far as the automotive industry’s assessment is concerned (Canada Auto Reports, 2009). (b) Describe and evaluate the main macro economic policies used by the canadian government and the bank of canada over the last two years. Economic policies used by the Canadian government and the Bank of Canada over the last two years have been prudent, and the economy had benefited from the presence of substantial budget surpluses, low interest rates, and tax reliefs. Controlled inflation, with the adoption of appropriate monetary policy settings. Budget surpluses in the past have enabled the government to pursue major reductions in debt and taxes. The monetary policy has sufficient leeway to address the slowdown in growth, while tax relief has extended much needed respite to ailing businesses. The currency remains relatively resilient. Problems still exist, despite fourth quarter scenarios of a slowly recovering economy. Fallout from the US credit crisis has forced a tightening of domestic credit, and fiscal policy will progressively feel the pressure of declining surpluses (due to tax cuts and weaker growth) and maturing liabilities. Weak exports may test the foreign exchange rate, but according to the OECD economic survey of Canada, this situation may be mitigated by resolute fiscal policy, particularly through investing abroad a greater portion of the public revenue resulting from high oil prices. According to the same OECD survey, the government’s move in absorbing deep tax cuts on corporate income and capital have done much to enhance business tax competitiveness. Furthermore, labour supply has received a boost from in-work tax credit. Even so, the government’s tax efforts should explore base broadening and shifting with the end in mind of lowering tax rates without further tax collection declines. Provincial retail sales tax that penalise business inputs would best be converted to the more efficient value added taxes. In order to spur supply-side activity, tax breaks to small firms and traditional sectors should be phased out. In the meantime, the federal government has been trying to free up the marketing of western grains, as it should be. However, it still maintains a protectionist stance on some other sectors with supply management. For instance, dairy farmers have enjoyed a quota system that have generated huge rents at the expense and to the detriment of consumers. Dependency behaviour has been induced among other farmers whom the government continues to prop up through federal and provincial budgetary support. (OECD, 2008) Canada Autos Report for the fourth quarter of 2009, in analysing the environment for the automobile industry, lauded the stimulus packages that the federal and provincial governments released into the economy, estimating that this stimulus effort will be able to add 3% growth to the GDP for fiscal years 2009 and 2010. Such a package requires time for it to take effect, however. In the meantime, the following policies are adopted, the effects of which may be felt in the shorter term: 1. Continuing low interest rates and the healthy conditions in the Canadian banking system, compared to those of other countries, is a sign that consumer spending has not collapsed as it has in other countries. Particularly in the case of the automobile and real estate industry (i.e., durable goods), parts of the Canadian economy have shown signs of picking up. 2. The biggest trading partner of the Canadian economy is the United States. The US economy has already shown early signs of recovery, meaning that Canadian exports to the US may begin to slowly recover. While a 20.9% real contraction is still expected in exports for the end of the present year, forecasts for 2010 are more optimistic at a positive 3.7% in real terms. 3. The early recovery of Canada will be largely due to a restocking process. Canada suffered one of the biggest inventory draw downs in their history. Since the Canadian economic cycle tends to lag US economic cycle, this restocking may be slightly delayed until the end of the year (2009), but will nevertheless occur. In the light of the above scenario, economic and monetary planners in Canada will tend to pursue a policy of lowered interest rates in a continued attempt to maintain low inflation rates. Canada will seek to restructure its tax bases while maintaining tax rates low, tapping new sources of taxation. This will prove important to replenish budget surpluses that have been depleted during the recession. (Bibbee, 2008) Production levels will move upwards under government incentives to business, and unemployment rates, which reach record levels at the height of the crisis, should also show a gradual return to normal levels. However, as the economy recovers, interest rates will be slowly raised to former levels. The agricultural sector will eventually face liberalization, with a reduction of the subsidies which are currently being shouldered by the customers. Jarrett & Kobayakawa, 2008) Conclusion Canada’s relative strength compared to other countries is the result of sound economic, fiscal and monetary policy by its leaders. They have effectively pursued a low-interest rate, low-inflation rate policy, which were brought about by government budget surplus and tax cuts. The economy suffered a downturn, Canada’s first recession in almost two decades, causing a downturn in exports, weakness in the forex rate, and increase in unemployment. These are seen to be resolved as the US, Canada’s biggest export market, gradually recovers. Protectionist policies, such as those in the agricultural industry, will be liberalized to enhance the future competitiveness of these industries. (Word count – 1500, excluding title and questions) REFERENCES Bibbee, A 2008 Tax Reform for Efficiency and Fairness in Canada. Economics Department Working Paper No. 631. OECD. Accessed 22 October 2009 from www.oecd.org/eco/working_papers Canada. Canada Country Monitor, Sep2009, p1. Canadian economy down in 4th quarter. Business. March 3, 2009. Accessed 22 October 2009 from http://news.webindia123.com/news/articles/Business/20090303/1189734.html. Gault, N & Orr, D 2008 Canadian Teleconference: Can the Canadian Economy Survive the Turmoil of the United States? Global Insight, Inc. Jarrett, P & Kobayakawa, S 2008 Modernising Canada’s Agriculture Policies. Economics Department Working Paper No. 629. OECD. Accessed 22 October 2009 from www.oecd.org/eco/working_papers Macroeconomic Forecast Scenario. Canada Autos Report, Q4 2009, p21-23 Organisation for Economic Co-operation and Development (OECD) 2008 Economic Survey of Canada 2008, June 2008. Vogel, L; Rusticelli, E; Richardson, P; Guichard, S; & Gianella, C 2008 Inflation Responses to Recent Shocks; Do G7 Countries Behave Differently. Economics Department Working Papers No. 689. OECD. Accessed 22 October 2009 from www.oecd.org/eco/working_papers World Wealth Report 2009. Capgemini Global Financial Services & Merrill Lynch Global Wealth Management. APPENDICES The graphs below have been sourced from Gault and Orr, 2008. Canada’s unemployment rate is at record low. Canada’s housing industry stays resilient while that in the US plunges The interest rate gap between the US and Canada reverses. The Canadian dollar peaks, then moves sideways against the American dollar Trade balance plunges, then moves into negative territory. Canada’s current account plunges Comparison of Canada with Other Countries Read More