Canada's Economy for the Past Two Years - Assignment Example

Canada’s Economy for the Past Two Years (A) How Successful Have the Canadian Government and the Bank of Canada Been in Running the Canadian Economy Over the Past Two Years? Canada’s economy has had a nice run where it has benefitted a lot from a boom in commodities over the recent past. The appreciation of the rates of exchange has resulted into some strains upon the central areas, which usually have an economic base that is stable, though. The Canadian economy has proven to be flexible despite the impacts of the recent credit crunch. In spite of the 2008’s slowdown, there is an expected come back in the year 2009. The prospects are that there will be a level of growth surpassing the recession effects. Thus, the short and medium-term macroeconomic measures should be coupled with the long-term issues which have been noted earlier by policymakers. (Publishing OECD publishing, 2008 p39) The economy of Canada managed to overcome various obstacles that deter a steady growth in the economy as per the Canadian Economic observer. Most of the funds were earned courtesy of resources. This economy was able to absorb such shocks like those caused by the declining US economy as well as the credit crunch rocking the whole globe. Products from the Agricultural sector realised their biggest increases in the year 2007. While numerous prices in the financial markets and the commodity markets as well were swiveling for over one year, real economic growth especially in the employment and output fronts were all time most steady. As per the statistics the real GDP growth was; 3.1%, 3.1%, 2.8% and 2.7% for the years 2004, 2005, 2006 and 2007 respectively. This growth in GDP is the most stable over four years since 1961. In comparison to the US, Canada’s real GDP growth was 2.7% in the year 2007 while that of US was 2.2%. For the first time in the last decade such a surpassing growth has been witnessed between Canada and US, in favor of the latter. (statcan.gc.ca, 2008) The Canadian conservative government, on its website, says that its legacy has been one of achievements. It has been striving towards achieving a Canada where citizens and their families would have an affordable life. The period of economic turmoil has had the government approaching its long-term goals with various economic weapons. Among the economic policies set by the government is the balancing of major tax cuts coupled with a disciplined reduction in debt, prudent government expenditures and a focused spending. Based on such policies, taxes have declined, disposable income available for households has escalated and thus, citizens have more income to save. To make the process of saving for its nationals easy, the conservative government has come up with new savings accounts that are free of taxes. This has particularly been one of the major incentives to saving for Canadians. (conservative.ca, 2009) The bank of Canada also presented a report about its monetary updates. This report was an assessment of the economy of Canada using a quarterly update, which it released in October, 2009 and it indicated that the strength of the Canadian dollar would be expected to offset the positive development that has occurred from July 2009. The positive growth in the economy seeks to refer to the unexpected revitalisation the world economy and that the economy of Canada is improving courtesy of fiscal and monetary stimulus, progressing financial conditions, risen wealth of households, higher prices of goods and services, services as well as stronger consumer and business confidence. The prospected GDP growth in the last two quarters of year 2009 is as follows: 2.0% in the third quarter and 3.3% in the fourth quarter. The rise in the value of the Canadian dollar is said to have emanated from the decline in the value of the US dollar against various major global currencies. (Desjardins, 2009) In the second quarter of 2009, the economy of Canada contracted at a rate of 3.4% which reflected an easing decline pace. This is especially while in comparison to the 6.1% fall in the 2009’s first quarter. A monthly report on GDP, which has a main purpose of measuring output of industries, reflected a 0.1% rise in output. This rise in output was the first in the last ten months. The GDP growth was pressurised downwards by the weak investment in businesses for the third quarter in a row. There had been a huge decline in corporate profits before tax; they fell by 37.5%, 57.7%, and 65% in the previous three consecutive quarters. Residential type of investments increased at a rate of 6.1%, though. On the other front, inventories which had plummeted by a rate of 5.2% in the prior two quarters fell by just 0.4% in the 2009’s second quarter. The economy of Canada was particularly supported by the consumer expenditure and government expenditure on commodities which rose by 1.8% and 3.2% respectively. Fixed investment by the government also escalated by 15.7% as per the second quarter reports. Overall, the decrease in the levels of quarterly GDP in the previous nine months of 2009 resulted into a high magnitude slack. However, the rise in GDP in the month of June suggested a termination in the fall in the near future. The fact portrayed here is that Canada is not free of foreign impacts despite the government’s efforts. An example is the performance of the US housing market- which has been reported to be rising in terms of prices recently. (rbc.com, 2009) The US housing market performed as follows: there was a sharp increase in the sales of homes where the sales rose by 9.4% in September of 2009. The level of sales of the houses was the highest in two years. That is, since July 2007. Also the level of inventory of un-disposed homes was a bit low. In September the fall in inventories went down to 7.8% from 9.3% as of August in 2009. This measure of unsold homes’ inventory is at its least since March 2007. In absolute figures, the inventories fell to 3.63 million from 3.92 million homes. (Heller, 2009) Table 1: Performance in GDP, of the Canadian Economy, for the past five quarters since 2008 Quarter year percentage growth in GDP 2 2008 0.3 3 2008 0.4 4 2008 -3.79 1 2009 -6.1 2 2009 -3.4 Figure 1: Graph Performance in GDP, of the Canadian Economy, for the past five quarters since 2008 Percentage GDP growth 1 0 (2008) 2 3 4 1(2009) 2 Quarters and year -1 -2 -3 -4 -5 -6 (B) Describe and Evaluate the Main Macroeconomic Policies Used By the Canadian Government and the Bank of Canada over the Past Two Years As Longworth said in his September 2009 speech, the past period of two years has been very intriguing for the Bank of Canada and the other global central banks alike. The Bank of Canada has been given the duty of promoting financial and economic wellbeing of the economy. The policymakers have thus a mandate of conducting research as well as analysis in the best way the world over. The mandate of the bank falls in four major areas. Namely funds management, currency, system of finance and monetary policy. The approach to these areas by the bank is generally the same. Firstly, the bank always has a clear objective. Secondly, it takes a long-term perspective to things. Thirdly, this bank makes itself accountable by remaining transparent regarding its steps as well as outcomes of these steps. Finally, the bank always considers the essential things first. Of particular focus at this point is its monetary policy. The main aim is to ensure confidence in the money value. This is done by way of a maintainance of stable, low, and predictable levels of inflation. The agreement between the government and the Bank of Canada is to maintain a target inflation of 2%. A monetary policy may involve a raise in the real interest rates. Insofar as real interest rates are concerned, it is good to note that they are positively related with inflation. Thus, a rise in real interest rates leads to an increase in inflation levels. A rise in real interest rates leads to a fall in output as the monetary policy curve shifts upwards and this translates into a fall in the amount of output demanded. This can be illustrated graphically as follows: Figure 2: An increase in real interest rates’ monetary policy Real rate of interest r2 (Π2) MP2 r1 (Π1) MP1 IS curve Output Inflation Π2 Π1 AD Output (Snowdon, 2002 p156) The monetary policy of the Bank of Canada has been highly aggressive while responding to the recession and the financial crisis hitting the world recently. Since April 2009, the overnight target rate of inflation has been ¼%. The bank, after a process of research, came up with three new tools of monetary policy to utilise. However, the first two tools have not been used so far- credit easing and quantitative tool. These two tools involve buying of assets. The third monetary tool has been applied. It is labeled “Conditional statements” and it refers to the monetary policy’s future path. Under this tool, the overnight rate of inflation was set to remain at its low rate up to the 2010’s second quarter. (bankofcanada.ca, 2009) Before embarking on the fiscal policy issue, by the Bank of Canada, it is of ample importance to illustrate the way the policy works. A fiscal policy usually involves taxation and government expenditure. There are two types of fiscal policy approaches; expansionary fiscal policy and contractionary fiscal policy. An expansionary fiscal policy will be the first to look at. An expansionary fiscal policy may take the form of either a decrease in taxes or an increase in expenditure. It results into a rise in Aggregate Demand (AD), which is designed to meet the Short-run Aggregate Supply curve (SRAS) and the Long-run Aggregate Supply curve (LRAS). A rise in Aggregate Demand affects the (Government, Consumption, Investment and Exports components of National Income). Thus, real GDP will rise as well as the price level:- Figure3: A graphical illustration of an expansionary fiscal policy Levels of prices AD1 LRAS SRAS P1 AD0 P0 Real GDP A contractionary policy has an opposite effect since it leads into a shift to the left-hand side of the AD curve. It involves a rise in taxes or a decrease in the level of expenditure. Figure4: A graphical illustration of a contractionary fiscal policy Levels of prices AD0 LRAS SRAS P0 AD1 P1 Real GDP (Pirayoff, 2004 p64) The economy of Canada did not experience the financial crisis rocking the world the world’s major nations. But, as an importer and exporter of major commodities, this economy was adversely impacted by commodity prices that were weaker as well as a drop in the world trade, especially with the American market in focus. Following the 2008 world recession, in November the same year the government with the aid of the Prime Minister Harper, Stephen released a statement of the economic and fiscal approaches called “Protecting Canada’s future.” This document had the government of Canada recognising the US situation and the other major economies’. It also outlined its fiscal and economic responses in general. The document adhered to the fundamental fiscal approach that the key to ensure economic stability in the long-term is emphasising upon the healthy finances of the government. To maintain a balanced budget, the document announced policies of expenditure reduction. This was with the inclusion of reduction of government cost, establishment of a law to ensure public sector wages were stabilised as well as the initiatives of controlling costs related to the Equalisation program of the government. Another step was the government’s suggestion that the tax decreases announced earlier and raised levels of government expenditure would lead to economic stabilisation. The approximated tax cuts amount for the fiscal year 2009-2010 was Canadian $31billion. Central to the budget of 2009 was a package that would lead to robust stimulation and it involved individual income tax decreases, targeted credits of tax and initiatives of expenditure that would raise the levels of demand in the economy. Examples to the specifics of this fiscal approach include the Canadian Skills and Transition strategy of $8.3 billion- to aid employees who had lost jobs as well as seeking training and skills development, Tax credits of $7.8 billion to trigger construction of homes, new infrastructure stimulus of $12 billion to cater for two years, funding, among others. (Makarenko, 2009) While concluding, it is of essence to note that despite the recent global economic recession, the Canadian economy was not directly affected but for the small ripple effects especially from the US economic. This is since the economy of Canada is an open one. The government and the Bank of Canada have done a great job, though, to counter the impact by way of monetary policies and fiscal policies as seen in the study. Work cited: conservative.ca . A Legacy of Achievement. 2009. Retrieved October 23, 2009 http://www.conservative.ca/EN/4689/ Desjardins, Dawn. Bank Of Canada's Monetary Policy Report Sees Recovery Taking Hold. 2009. Retrieved October 23, 2009 http://www.rbc.com/economics/market/daily_e.html Ferley, Paul. Canadian National GDP Accounts: Pace of Decline in GDP Eases Up. 2009. Retrieved October 23, 2009 http://www.rbc.com/economics/market/pdf/natacct1.pdf Heller, Josh. U.S. Existing Home Sales Rise Sharply With Inventories Sinking. 2009. Retrieved October 23, 2009 http://www.rbc.com/economics/market/daily_e.html  Longworth, David. Promoting Canada's Economic and Financial Well-Being. 2009. http://test.bankofcanada.ca/en/speeches/2009/sp230909.html Makarenko, Jay. Canadian Fiscal Policy And the 2008-09 Global Recession. 2009. Retrieved October 23, 2009 Http://Www.Mapleleafweb.Com/Features/Federal-Fiscal-Policy- Canada-History-Operation-And-Trends-Global-Recession Pirayoff, Ron. CliffsAP Economics Micro & Macro. John Wiley and Sons. Edition illustrated, 2004. Publishing Oecd Publishing. OECD Economic Surveys: Canada 2008. OECD Publishing, 2008. Snowdon, Brian. Conversations on Growth, Stability and Trade: An Historical Perspective. Edward Elgar Publishing. Edition illustrated, 2002. statcan.gc.ca . Study: Canada's Economy in 2007.  2008. Retrieved October 23, 2009 http://www.statcan.gc.ca/daily-quotidien/080410/dq080410b-eng.htm Read More