Individual Research
Essay – Canada

Nicole Edwards

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December 10, 2017

BUSI 2003
Macroeconomics in Global Context (17F- Section B)

Professor: Leon
Guendoo

The Canadian economy is performing well according to the TRC
Economic Outlook (Canada, 2017). “Consumer spending, business investment and
government spending are all providing the momentum that should see
above-potential growth continue through the rest of this year.” (Canada,
2017).  The GDP is expected to increase
by 3.1% in 2017 and 2.2% in 2018 (Canada, 2017).  The key driver of growth in 2017 is Canadian
consumer spending, though it is predicted that this will slow down in 2018
(Canada, 2017).  “Investment spending is
expected to add growth every in quarter this year, and will likely remain an
important driver of the economy in 2018.” (Canada, 2017). 

The GDP for 2016 was 1,529.76 billion USD representing 2.47%
of the world economy and the GDP per capita was 50,231.90 USD is equivalent to
398% of the world’s average (Trading Economics, 2017).  The real GDP dropped to 0.4% in Q3 of 2017 with the main
contributor was an increase of household final consumption expenditure
(Statistics Canada, 2017).  Imports were
unchanged and exports decreased by 2.7%, of this was goods (-3.4%), motor
vehicles and parts (-9.0%), metal and non-metallic mineral products (-4.5%),
consumer goods (-3.1%), and energy products (-1.9%) (Statistics Canada,
2017).  However, “exports of services
grew 0.7% on the strength of commercial services (+2.5%).” (Statistics Canada,
2017). 

The Growth rate for the GDP peaked at 3.6% in July 2017 and
dropped to 3% in October 2017 (Trading Economics, 2017).  In the past 5 years the growth rate has
fluctuated to highs and lows, but 2017 we see the growth rate at a high not
seen since 2014 (Trading Economics, 2017). 

Per capita real GDP on Purchasing Power Parity basis was
43,087.80 USD in 2016 which is equivalent to 243% of the world’s average
(Trading Economics, 2017).  GDP per
capita on Purchasing Power Parity is showing a steady increase since 2010 from
40,699.3351 to 43,087.80 (Trading Economics, 2017).    

In mid-June the Bank of Canada increased interest rates,
which has not been done in over 7 years, in response to the health of the
economy and another increase in September 2017 (Canada, 2017).  “We anticipate the bank will reduce policy
stimulus further in the quarters ahead. The overnight rate is expected to
finish 2018 at 2.0 percent up from 1.0 percent today.” (Canada, 2017).  The Bank f Canada’s policy interest rate is
1% as of December 6, 2017 (Bank of Canada, 2017). 

The Canadian dollar dropped 0.57 US cents to trade at 78.19
due to the Bank of Canada holding interest rates steady (Thomson Reuters,
2017).  “RBC now forecasts the Canadian
dollar will average close to 80 U.S. cents over the forecast horizon.” (Canada,
2017).  Lower prices for oil, a major
export for Canada, crude oil prices in the U.S. dropped 1.48%, $56.77 USD per barrel
(Thomson Reuters, 2017).  In Canada the
exchange rate system is flexible since the target for inflation keeps the
Canadian dollar regulated there is no target for the currency exchange rate
(Bank of Canada, 2012).   

Labour productivity decreased by 0.6% a second decline in
two quarters due to hours worked increase faster than business output (Thomson
Reuters, 2017).  “Despite rising
employment and participation rates, other indicators point to ongoing – albeit
diminishing – slack in the labour market, the central bank said.” (Thomson
Reuters, 2017).  The unemployment rate as
of November 2017 is 5.9%, which is the lowest since February 2008 with
employment up 80,000 (Statistics Canada, 2017). 
“In the 12 months to November, employment was up by 390,000 (+2.1%),
with all the gains attributable to full-time work (+441,000 or +3.0%) as
part-time employment was down slightly. Over the same period, total hours
worked grew by 1.0%” (Statistics Canada, 2017). 
Employment gains were seen in wholesale and retail trade, manufacturing,
educational services, and construction with agriculture seeing a decrease
(Statistics Canada, 2017).  Full
employment in Canada is dependent on an unemployment rate of around 5.7% to
5.8% (MNI, 2014).  Since the unemployment
rate is below 6%, the top range for the Non-Accelerating- Inflation Rate of
Unemployment (MNI, 2014).      

The inflation rate as of October 2017 was 1.4%, lower than
the Bank of Canada’s target of 2%, which was due to slight price increase for
gasoline (CBC News, 2017).  TD senior
economist James Marple stated “Wage growth has accelerated notably in
recent months and job growth has been concentrated in full-time positions.
Alongside a lower Canadian dollar and more stable energy prices, this should
set the stage for inflation to move toward two per cent over the next
year.” (CBC News, 2017).  Canada is
currently experiencing an inflationary gap as the output is below the
potential, since labour productivity has decreased. 

The business cycle Canada is currently in is an expansion
period as we see the GDP increasing and the economy is in a growth
pattern.  “Mildly expansionary fiscal
policy has supported growth in 2016 and 2017, hastening the economy’s return to
full employment.” (OECD, 2017).

Canada uses fiscal and monetary polices to stabilize the
economy.  Utilizing fiscal policy to
determine their plan for expenditures “on a variety of items including benefits
(for the retired, unemployed and disabled), education, health care, transport,
defense and interest on national debt.” (Chand, n.d.).  The government estimates the amount of tax
revenue they will receive for the year and plan accordingly.  The monetary policy is used to make changes
in the money supply (Chand, n.d.). 
“Changes in the money supply, as with changes in interest rates, are
implemented by Central Banks on behalf of governments.” (Chand, n.d.). 

The Canadian government is addressing the issue of an aging
workforce through immigration, with the understanding that this cannot solve
the whole issue (Government of Canada, 2017). 
“In 1971, there were 6.6 people of working age for each senior. By 2012,
the worker-to-retiree ratio had dropped to 4.2 to 1, and projections put the
ratio at 2 to 1 by 2036, at which time five million Canadians are set to retire.”
(Government of Canada, 2017).  Immigrants also bring growth to the economy
to close gaps in the labour market due to skill shortages and provide
innovation (Government of Canada, 2017). 
20% of Canada’s population is made up of immigrants about 50% hold
science, technology, engineering and math degrees equivalent to the Canadian
bachelor’s degrees (Government of Canada, 2017).    

The International Monetary Fund gave credit to the Trudeau
government for tax cuts for the middle class, expanded family benefits, and
raised infrastructure spending through government spending and the low interest
rates (InsideToronto.com, 2017).  A concern
that needs to be anticipated is the Trump administration’s promise to cut
corporate taxes that would weaken Canada’s ability to attract investors, as
well as what will become of NAFTA (InsideToronto.com, 2017). 

The Bank of Canada should continue to be cautious in
changing interest rates and the monetary policy (InsideToronto.com, 2017).  A careful eye should be kept on the housing
market to avoid any sharp drops impacting the economy negatively and the price
of oil decreasing further (InsideToronto.com, 2017). 

While Canada is “one of the fastest growing economies in the
developed world” (Castaldo, 2017) the future is of concern.  The GDP is in a growth pattern with the
energy sector in recovery and gains from manufacturing, wholesale and retail
trade (Castaldo, 2017).  This could be
impacted by less consumer spending and a drop in the housing market (Castaldo,
2017). 

Overall job growth is showing a reduction in unemployment
even within the manufacturing industry, which has see the biggest hits (Castaldo,
2017).  “Alberta, still on the mend, has
experienced an uptick of more than 20,000 jobs since the start of the
year, too.” (Castaldo, 2017).  Job growth
in full time has matched part time this past year showing a decrease in the
unemployment rate (Castaldo, 2017).  If
the pattern continues there is a good chance that the unemployment rate could
continue to decrease. 

While the housing market has contributed to the growth it
has been an extreme level of growth that cannot be sustained.  “The numbers are so strong that some
economists are cautioning the Ontario government about implementing measures to
cool the housing market.” (Castaldo, 2017).   

Exports are the biggest concern, as the growth is low
“Canada sunk back into a deficit of $972 million in February with exports
falling 2.4 per cent.” (Castaldo, 2017). 
Reliance on a low dollar is not enough to compete and having to worry
about border-adjustment taxes will make exporting from Canada less attractive
(Castaldo, 2017).     

“Business investment is a relatively small share of GDP
(about 12 per cent) but it’s an important indicator of future expectations, and
drives all sorts of other economic activity.” (Castaldo, 2017).  This has been steadily decreasing since 2014,
since the oil crash, and the chances that this will drastically change is low
(Castaldo, 2017). 

While employment growth is steady, salaries are not as high,
which is attributed to the loss of jobs in the oil sands that were higher
salaries than what is available in other industries (Castaldo, 2017).  With the minimum wage increases over the next
2 years to $15, the wage growth will see an increase and there could be
reduction in employment to offset the impact to the bottom line of businesses.  Inflation is predicted to rise from 1.6% in
2017 to 2.06% in 2019 and drop to 1.93% in 2022 (Statista.  2017).

   The Canadian
economy has seen it’s share of ups and downs, but it is an overall strong and
stable economy.  However, it is highly
dependent on the USA, so there are concerns of how the impact of NAFTA through
the Trump Administration will affect exports and investment in Canada.