CANADIAN ECONOMY 2014 AND BEYOND: ISSUES, AND ACTIONS REQUIRED

The Bank of Canada (BoC) gave its latest assessment of Canadian economy in its Monetary Policy Report of 22 January 2014; some of the key points of the Report are:

·       Inflation in Canada has moved further below the 2 per cent target. This is due largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period.

·       The Bank expects inflation to return to the 2 per cent target in two years or so, as the effects of retail competition dissipate and excess capacity is absorbed.

·       The United States will lead the way, helped by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets.

·       In Canada, economic growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment.

·       While we are doing more work to understand the wedge between the level of Canadian exports and that of foreign demand, this remains difficult to explain. We are therefore taking a conservative approach to our forecasts for exports, and assuming the wedge will remain.

·       That said, the U.S. recovery is becoming more broad-based, including higher investment spending by companies, and that, as well as the recent depreciation of the Canadian dollar, should help to boost exports. This, in turn, should lead to stronger business confidence and investment here in Canada.

·       Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

·       Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years or so.

·       Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed.

Basics of Canadian economy:

-     30% of GDP comes from exports
-     >60% from internal consumption

GDP contributors by Sector:

-     ~11% of GDP comes from manufacturing
-     ~8% comes from mining, quarrying and oil or gas extraction
-     ~79% from service sector (including public administration)
-     ~2% comes from agriculture, forestry, fishing and hunting

Some salient issues vis-a-vis Canadian economy:

Ø  As BoC mentioned, the wedge between the level of Canadian exports and that of foreign demand;

Ø  Strength of Canadian Dollar vis-à-vis US Dollar and other major currencies including Korean Won;

Ø  Reluctance on part of big capital owners (companies, individuals) to invest (the reasons need to be understood and addressed – more on this later), hence lack of multiplier effect in the economy;

Ø  Dis-inflation;

Ø  Too much dependence on US economy’s health;

Ø  Sluggishness creeping in China’s GDP growth (hence impacting consumption of goods and therefore import of goods from other countries, including Canada);

Ø  Absence of federal government/manufacturing industry/agriculture/service sector coordination and policy making (there is reasonably good coordination between mining, oil and gas and federal government though);

Ø  Extremely tardy progress on providing finality re: investment/export avenues (e.g., oil export, LNG export);

Ø  Slow turnaround in European Union’s economic health.

Salient list of actions required by Federal/Provincial Governments to infuse more vigor in Canadian economy:

-     Review export items vis-à-vis existing export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements;

-     Review export items vis-à-vis new and potential export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements (look for new regions, like, South America, Africa and untapped Asian regions) and adding new items;

-     Devise policies that encourage manufacturing/production of those products that have export potential in existing and new markets (example, bitumen, natural gas, high-tech items);

-     Have more cohesive and inclusive federal government/manufacturing industry/agriculture/service sector coordination;

-     Promote innovation in the industry in a big way through incentives;

-     Encourage big capital owners to invest – have continual dialogue and make necessary adjustment in policies (conclude reviews quickly, conclude deals with provincial agencies, first nations tribes in an expeditious manner rather than a process that takes forever to complete, or, sometime, never reaches any conclusion);

-     New investments would result in more employment and hence have multiplier effect of higher consumption;

-     Subtly encourage consumption (not necessarily in housing sector but other areas which won’t load the national debt situation)

-     BoC may consider lowering interest rate and/or engage in some sort of quantitative easing;

-     Stimulus spending should be kept as one of many options of last resort;

-     Create an optimistic environment rather than that of impending gloom and doom (one of the key requirements would be that the political parties would need to talk less in inflammatory and fear mongering tone, less recriminations and uttering nonsense)

Summary:

Other countries too are facing similar situations as Canada faces and, therefore, they too are considering many of the abovementioned strategies and actions. Therefore, the window of opportunity is short and there is lot of competition out there. If Canada wants to maintain its pre-eminent position within the G-7 nations and international comity at large, Canada would have to act quickly and decisively both at Federal and provincial levels in a coordinated manner without the political ideologies inhibiting such coordination. There are already signs of wear and tear at some aspects of social support and quality of life which Canada is famous for and proud of; if Canada does not act soon, things would get worsened and some damage may be irreparable.