The Economic Health and Progress of the Canadian Economy - Essay Example

Canadian Economy This report examines the economic health and progress of the Canadian economy over the current time horizon with the help of the economic concepts and measures like the Gross National Product (GNP), unemployment rate and the inflation rate. The paper also provides additional economic indicators that help a definitive conclusion on the state of the Canadian economy. The report also goes on to examine the fiscal and monetary policy as is being practiced in Canadian jurisdictions and comments on the policy making in respect of tackling the most critical issue of inflation control through the policy of inflation targeting. The report concludes that the Canadian economy has traversed successfully over the period from several natural and economic shocks and entered into a phase of economic expansion and growth despite the fact that its major trading partner USA has been experiencing an ongoing recession and sector specific downturns. The main economic indicators of the health of any economy comprise in either the absolute figure of the Gross National Product(GNP) or the Gross National Expenditure(GNE) of the economy ,preferably on deflated basis with a base year or the period to period growth rate in such a rate ;unemployment rate is another critical indicators of the economic development and growth as it indicates the percentage of the able bodies that are not gainfully employed; the third and last most important indicator of the economic health of the economy is the inflation rate which indicates the rate at which a chosen set of prices are rising and thereby determines the real purchasing power of the national currency. A high degree of inflation often leads to widespread erosion of economic value and if the inflation is caused by monetary factors then the economic results can give misleading results if measured at market prices. Canadian economy has come out of period of recession and is on an expansionary phase. It has experienced this growth despite several shocks like the hit to beef exports caused by the Mad Cow disease SAARS afflictions etc. As of the 3rd quarter 2007 the total population of Canada was placed at 32,976,026 .As of October 2007 Canada had an unemployment rate of 5.8 % .As of September 2007 the overall Canadian inflation rate was measured at 2.5 % .Real GDP rose by 0.2 % as of August 2007. Gross domestic product (GDP) is the most often used economic indicator to arrive at a good measure of the value of economic activity. In fact, the GDP is a double edged sword in the sense that it helps measure two major economic data over the reference period: the total income of the population in the economy and the total expenditure incurred on the economy’s domestic output of goods and services. A major factor that makes the GDP measure these two things is the fact that whatever one person in the economy spends becomes the income of another person; because in the ultimate sense each person in the economy assumes one of the two roles i.e. either that of the buyer or that of the seller. If one is not a seller himself, more general position then he is a member of a seller organization which is an economic agent and pays the member for selling his services. Speaking from the accounting point of view, for the economy as a whole, income and expenditure must always equal one another. In the 2nd quarter of 2007 Canadian exports rose by 0.7 % ;whereas the imports rose by 1.6 % in the same period. The exchange rate of the Canadian dollar with its major trading currency the US dollar stood at 1.0254 as of October 2007.The most sensitive and indicative of all interest rates i.e. The Prime interest rate was placed at 6.25 % as of October 2007. The stock markets also witnessed a good turnover and activity and the S&P/TSX Composite Index, with base of 1975 stood at 14,625.00 as of October 2007.The most important economic indicators of the Federal debt was placed in the year 2006 at $481,499.0 millions. As a measure of business activity the retail sales also moved up by 0.7 % in August 2007. As of October 2007, the housing starts were placed at 219.5(000’s) thousands and the Composite leading indicator recorded a positive change of 0.4 % in September 2007. (Pulse, 2007).Thus all indicators point to the fact that the Canadian economy is entering another phase of economic expansion. Fiscal Policy: Fiscal policy is one of the most important policy making in any ecnomy.Its major milestone is the national budget. Canada has been taking on a very cautious fiscal stance since the last decade or more. Fiscal policy has been constantly aiming at arriving at a balanced or even surplus budget. Tax structure is sought to be made more rationalized with the objective that the common tax payer has a reduced burden of paying taxes annually. This also implied that the federal expenditures are sought to be controlled in manner that wasteful expenditures are identified and sliced while productive expenditures are encouraged. The finance minister of Canada has often reiterated this fiscal stance in his speeches at various fora. The below given extract from the speech makes the fiscal stance of the Canada abundantly clear: “By any measure, our economic and fiscal fundamentals are as solid as the Canadian Shield: We are experiencing the second longest period of economic expansion in Canadian history; Our budget is not only balanced, it is more than balanced, allowing us to pay down record amounts of debt; Business investment is expanding for the 12th consecutive year; Our unemployment rate is the lowest in 33 years, with more Canadians working than ever before. Since this Government took office, employment has increased by more than 590,000, with employment up in every province; Canada is an emerging energy superpower with the second largest petroleum reserves on the planet next to Saudi Arabia; Canada is one of the few countries in the world with sound public pension plans; and We’re on the best fiscal footing of any country in the G7. In fact, we are the only member of the G7 with both ongoing budget surpluses and a falling debt burden”. (The Honorable, 2007). However the finance minister is not unmindful of the changing scenario in which the Canadian economy is thriving at the moment and is making cushion room for all such challenges within its fiscal policy. In he above quote speech the finance minister went on to explain some of these aspects in following words, “Although Canada is on a solid financial footing, we are mindful of the challenges that confront us, global pressures and domestic challenges that vary from region to region and sector to sector. The people who work on our shop floors and our assembly lines, the people who work in our forests and in our mills are struggling. The manufacturing and forestry sectors are bearing the brunt of a strong Canadian dollar. They are facing increased competition from emerging economies. This is a difficult situation. We are seeing unprecedented growth in some parts of the country. That is driving up the cost of living and leading to a shortage of skilled workers. For many families in many regions, the dream of someday owning a home is quickly evaporating as escalating prices move beyond the capacity of family budgets. This also is a difficult situation. (The Honorable, 2007). The last mention about the real estate prices and sector and market specific rise in cost of livings are demand supply mismatch challenges and they are to be dealt with specifically targeted monetary and fiscal measures. This is discussed further in the sections that follow. Monetary Policy Bank of Canada administers the Canadian monetary policy. Its monetary stance has been having the single most important refrain i.e. watchful superintendence of the inflation figures while at the same time ensuring growth rates that lead to low employment rates and all round expansion of the economic activities. This is called a caution based monetary policy which is doubly aimed at stable economic expansion. It has explicit aim of maintaining a targeted exchange rate of the Canadian dollar on the reverse side of it-essentially through the purchasing power parity route rather than through the explicit management of the international demand and supply of the Canadian dollar. The bank of Canada states its monetary policy stance in its annual report for the year 2006 in following words, “ Experience in Canada and elsewhere has shown that the best contribution monetary policy can make to the economic well-being of households and businesses is to follow a strategy aimed at delivering low, stable, and predictable inflation. This objective is pursued not as an end in itself, but as a means of promoting sustainable economic growth and stability. The inflation targeting framework introduced in 1991 is designed to facilitate the achievement of this objective, and to improve the Bank of Canada’s accountability, by specifying an explicit target for the annual rate of increase in the consumer price index (CPI). In November 2006, the Government of Canada and the Bank of Canada renewed Canada’s inflation-control framework for a further five-year period, maintaining the inflation target at the 2 per cent midpoint of a 1 to 3 per cent control range”.(Bank,2006) In the above it is important to mention that inflation targeting is not an end character objective of the monetary policy but only an intermediate target to the ultimate goal of the stable economic growth, which implies that the Bank may not hesitate to indulge in encouraging benign inflation if it is real activity based and leads to economic expansion that helps futuristic economic consolidation. U.S.A.: The fortunes of the Canadian economy are tied to its neighboring major trading super power i.e. the US. Therefore, often the resilience of the Canadian economy is tested whenever the US economy is passing through troughs and bottoms. However of late the Canadian economy has proven that I can remain largely insulted to demand and supply side shocks that emanate from the US by maintaining its own tempo of economic activity. This is remarkable as the US has been, traditionally, the major trading partner of Canada since several decades. The following short statement explains the above major development in the fortunes of the Canadian economy “The Canadian economy of the 21st century is diversified. Although Canada sells goods and services around the world, more than 80% of exports and 70% of imports are with the United States. (The Economy, 2004). Looking at the US-Canadian trading relationships literature explains the deep and historic economic ties in following words, “In 1983, the government of Prime Minister Trudeau embarked on negotiation of sectoral free-trade arrangements with the US. With the election of the Conservatives and Prime Minister Mulroney in 1984, Canada sought closer economic ties with the US and in 1985 Mulroney asked the US to negotiate a comprehensive free-trade agreement. In October 1987 the 2 countries announced they had an agreement, which was subsequently ratified by the US Congress and by the Canadian Parliament and, where relevant, the provincial governments. Under the proposed agreement, all tariffs between the 2 countries are to be eliminated over a 10-year period, starting 1 January 1989. In addition, a bi-national dispute settlement mechanism was established to review, on points of law, the application of countervail or other penalties of trade-remedy laws of national trade agencies against the other country. If the imposition of a penalty again is not in accordance with US trade law, for example, the bi-national body can require it be removed. The US could still unilaterally enact harsher trade remedy laws, but it must notify Canada and mention Canada by name in amendments to its trade laws. A Canada-US Trade Commission, headed by the trade ministries of the 2 countries, administers the proposed agreement”. (Closer, 2007) Thus tariff between the two nations trade have been structured and rationalized, most trade traffic is largely set free and there is a system that addresses trade disputes in an orderly fashion. This has boosted Canadian exports to US and Canadian imports from US. However, the figures reveal that Canada is a net exporter to the US in a major fashion and any US demand side recession can affect the fortune of the Canadian exporters in major way. However, the recent real estate and the prime rate based US recession has not affected the Canadian growth rates ;but indicate at the potential of the Canadian economy in the sense that a normal US economy would have boosted the Canadian growth rates even further. The quoted source on the US-Canadian economic ties goes on to explain further in following words, “In other provisions, Canada largely eliminates its restrictions on US takeovers of Canadian companies, except for those with assets of $150 million or more, and does not in future require US subsidiaries to sell shares to Canadians or force them to promote exports or use Canadian suppliers. US-owned companies now have to be treated in the same way as Canadian-owned companies. On energy, Canada shares oil and gas shortages with the US, and does not use its energy, including electricity, to create an advantage for Canadian industry or Canadian consumers through lower prices”. (Closer, 2007) Recent Economic Forecasts The most important economic forecast is in relation to the economy wide inflation rate. This has been revised downwards from 5% to 2% in the year 2006. The following literature source explains this target cum forecast figure setting in following words, “Canada first announced inflation targets in February 1991. The initial objective was to reduce inflation from an underlying rate of roughly 4 to 5 per cent at the start of 1991 to 2 per cent by the end of 1995. Focus then shifted towards maintaining a low, stable, and predictable 2 per cent rate of inflation. Find and refer to articles about the economy from a variety of sources such as small business spokespersons, exporters, labor unions, etc. (Renewal, 2006) POLICIES The policy issue of inflation targeting has been a major issue in most economies’ jurisdictions. In Canada this became an important issue from the year 1991. Following literature source lists out the various benefits of the inflation targeting policy initiatives, “Since Canada adopted an inflation-targeting regime in 1991, the record shows that inflation has been low and stable and, as a result, Canadians have benefited in a number of important ways. An improved inflation environment has allowed consumers and businesses to manage their finances with greater certainty about the future purchasing power of their savings and income. Low and stable inflation has also meant that interest rates, both in nominal and real terms, have been lower. More broadly, low, stable, and predictable inflation has helped encourage more stable economic growth in Canada and lower and less-variable unemployment”. However, as had been noted above that in select pockets of the economy there were large and sharp mismatches in the supply and demand for skilled labor and goods and services where participants of such pockets went for their economic activities. This had caused the general cost of living and made difficult acquisition of housing assets whose prices had soared. This clearly implies that there is sectoral inflation that is bypassed by the overall inflation targeting. Thus, it is always better, in such instances to address the demand and supply issues in such markets through appropriate fiscal and monetary measures. In all such cases prices that are sensitive are to be targeted and measures taken to ease supplies and restrict demand that are artificial and speculative. This can be done through the tools of subsidies and interest rates. Work Cited Pulse of the Economy.(2007). Retrieved on November 9, 2007 from http://canadianeconomy.gc.ca/english.....html. The Honorable James M. Flaherty, P.C., M.P. (2007). Speech given on October 30, 2007 - Ottawa, Ontario. Retrieved on November 9, 2007 from Minister of Finance http://www.fin.gc.ca/ec2007/speech/speeche.html Bank of Canada. (2006).Annual Report. Retrieved on November 9, 2007 from www.bankofcanada.ca. The Economy.(2004). Retrieved on November 9, 2007 from http://www43.statcan.ca/03/03_000_e.htm. Closer Economic Ties.(2007). Retrieved on November 9, 2007 from http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1SEC817650. Renewal of the Inflation-Control Target.(2006). Retrieved on November 9, 2007 from www.bankofcanada.ca. Read More