Canadian Bank forecast of the Canadian Economy - Essay Example

Canadian Bank forecast of the Canadian Economy The economic growth registered by the Canada in the first quarter of the economic calendar is expected to be slower. The growth will be felt more in the second quarter. The estimates put by the Toronto Bank of Canada put the growth forecast of the Canadian economy at 1.0%, for the first quarter, but later trimmed the expectations to 0.5%. Contrary to theses expectations, the Central Bank expects the economic growth to be 1.5% over the same period. The Canadian economic outlook survey states that the economic growth of the Canadian Economy will be felt more in the last three quarters of the economic year. This growth is attributed to the strengthening of the Canadian dollar against major world currencies as the Euro and the US dollar. The low interest rates as well as the consumer energy saving expectations also will play a major role in the growth of the economy over the mentioned periods. The fall of oil prices is an indication to the Canadian economy that its consumers are enjoying the benefits that come along with the reduced price of energy. The fall in the world prices of oil is however not going to have significant effects on the prices of goods. This is due to the rise in the cost of the imported goods. The average Canadian household is expected to save approximately $800 from fuel alone. Despite this, $600 of the saved energy costs is expected to offset the bills from the purchase of higher priced imported goods. The low prices of oil create a real problem in the Canadian economy for the rest of the economic calendar. Given that, the quarterly growth estimation is at 0.5%, while that of the annual growth is at 1.9%. The Bank has revised the growth estimates in order to give room for the effect of the falling oil prices. This effect of the fall in oil prices will definitely cause a shock to the Canadian economy. The economy is expected to sustain the pressure as the Canada relies on more than the energy sector. The effects of the oil prices are an indication that the levels of business investments will fall. The lower interest rates that the Canadian Bank has imposed act as an incentive to lure more investments hence boost economic growth. The move is set to be a disinflationary move. The Central Bank hopes that the rates will further reduce to soften the impact of the falling prices of oil. The fixed rate mortgages are set to decline as the bond yields lower with the fall in interest rates (Alquist, Ron & Olivier, 15). The Bank of Canada expects that the overnight rate will rise with the improvement in the economic situation of the Canadian economy. This downward movement continues to fall until the oil prices start to rise above US$50 per barrel. This implies that the Canadian homeowners could shop for their mortgages within the period of the lower interest rates. The rates of the mortgages will boost the prices of homes in Canada. The major areas where the declining mortgage rates will be felt are the Toronto’s property market. In this, market prices could climb to 5% up from an initial 0.5%. This will lift the overall industrial outlook. However, these rates will be felt in Central Canada. The cheaper mortgage rates will affect the Atlantic and Central Canadian areas. The impact of lower oil prices will be felt more in the Western Canadian areas where the interest rates will take time to change. Western Canada is the main crude oil producer for the Canadian economy. The people who are dependent on investments that bear interests face hard economic times as the Central Bank’s choice to alter the policies pushes them into venturing into alternative businesses (Alquist, Ron & Olivier, 21). The fall in oil prices forces the Bank of Canada to cut the overnight lending rates. This is because the effects of the falling oil price are felt negatively n the Canadian market. This means that the revenue that Canada enjoys from exporting oil reduces significantly. The falling prices also affect the employment and the investment levels in the energy sector. The overnight lending rates, which was at 1.0% for the past five economic years, has declined to 0.75%. This fall in overnight rates has adverse effects on the lines of credit, and the loans that depend on the prime rates. This is dependent on the banks lowering the prime rates. The effect of the falling crude oil prices has impacts on the Canadian dollar. This implies that the US dollar gains value against the weakening Canadian dollar. The Canadian dollar exhibits a positive relationship with the oil prices. The exchange rate between the US Dollar and the Canadian Dollar is determined by other external factors other than the supply and demand of the currencies. The US dollar, being the unit for most Canadian global imports and exports, is the most proffered currency for the transactions involving energy. During the periods that the oil prices are high, the Canadian dollar earns more US Dollars per barrel. This implies that the Canadian dollar has a positive relationship with the US Dollar when it concerns oil. This relationship is attributed to the contribution that oil makes to the Canadian economy in US Dollars. Crude oil is the largest contributor to the foreign exchange revenue earned by Canada. The price of oil is the major determinant of the exchange rate between the two currencies. Most of the time, the gain of value of the US dollar in the global foreign exchange market correlates to a gain in value of the Canadian dollar. The economic growth of Canada depends on the impact of the free trade agreements signed by the Canadian government. These agreements boost the economy as they offer local manufacturers and producers a chance to compete in global markets. The year 2014 saw South Korea and the European Union sign free trade agreements with Canada. This move acts as a reversal tactic to suppress the economy’s export trend that is negative. The number of laborers working in factories is a major determinant in the economic growth of Canada. The low numbers of factory workers has grievous implications on the ability to manufacture enough quality and quantity goods to compete in the International market. The economy has registered increasing numbers of the factory workers, but these numbers are not enough to counter the ever-increasing demand for Canadian products in the global market. The losses of revenue that Canada suffers from arise from the deficiency of exports that is destroyed by the inadequate labor available on the factories. The unemployment rate of Canada hit the lowest in six years after recording 6.6% in the year 2014. This puts the Canadian economy at a poised position to improve in 2015 considering the number of young people willing to work. The government has received criticism from youth groups and labor groups at large, urging it to improve the employment conditions in the country. The actions of the finance ministry also play a major role in the determination of the Canadian economic growth. The previous minister of finance had a successful long-term stint that was marked by landmark achievements. The Federal tax revenue reduced in relation to the GDP, the lowest registered since the end of the World War 2. The Canadian economy performed superbly, outshining the G7 average. The goal of the current minister is to ensure that Canada achieves a surplus. Canadian foreign acquisitions in the year 2015 play a fundamental role in the economic outlook of the country. The 2014 foreign acquisition of Canada was $69.6 billion. The purchase of Warren Buffet’s Berkshire Hathaway Inc unit called the Alta link earned the country reasonable income. This move lures more investors to take up investment opportunities in the Canadian economy, as the Chinese investment in the Canadian oil sector. Risks of the Inflation Outlook Inflation is the general increase in the prices of services and goods. Inflation is measured annually as percentage. A rise in inflation implies that every unit of currency that a consumer spends earns him / her smaller amount of a service or a good. The opposite is experienced when the general prices of commodities are falling, a condition referred to as Deflation. In some situations, the prices of commodities and services can shoot up drastically up to abnormal rates. This situation is hyperinflation. The risks of inflation are speculations that establish the effect of inflation on the investment of an economy. In Canada, the falling oil prices cause major shocks to the economy. These shocks translate into negative inflation. The risks of deflation are damaging for the economy as producers realize little revenue for their products as other International markets keep their prices constant. The prices of crude oil continue to push further downwards. These cuts in the international price of oil have adverse effects on the oil producing countries. The second quarter of the economic calendar is likely to register sub zero inflation rates as the prices of oil continue to fall further. According to the inflation prediction, an annual inflation rate of 0.3% was put for the same period. The decision that will affect the interest rates is dependent on the risks attached to the rate of inflation. The reaction of the Bank of Canada to lower the key interest rates from the previous one percent to the current 0.75% acts to cushion the Canadian economy from the depreciation of prices of their major foreign exchange earner. The expectations are that the Bank of Canada will further adjust the rates if the international price of oil continues to plummet. This implies that the negative inflation is a more likely eventuality that will further push the interest rates lower. The fears experienced in off shore markets due to the fall in oil prices could affect the domestic cycle of customer behaviors. The fall of oil prices acts as an incentive for economies that are not oil producers to produce more as the cost of production is low. The European market, for instance, fears for deflation (Alquist, Ron & Olivier, 45). This fall in the cost of services and goods lures many consumers to restrain from making purchases, as their prospects are that the prices will dip even further. This affects the Canadian economy because the lower prices in international markets will discourage the exports of the Canadian manufacturers and consumers. A reduction in exports translates into excess supply of goods in the domestic Canadian market. This will further lower the general domestic prices of goods and services in the Canadian market. The inflationary risk associated with the fluctuating oil prices is negative in both the Canadian and international economy. When the oil prices per barrel fall, as is the case, the inflation in the Canadian economy is negative. This hurts the economic health of Canada. Works Cited Alquist, Ron, and Olivier Gervais. The Role of Financial Speculation in Driving the Price of Crude Oil. Ottawa: Bank of Canada, 2011. (Alquist, Ron & Olivier) Read More