Economy and Trade
A land of vast distances and rich natural resources, Canada became a self-governing dominion in 1867 while retaining ties to the British crown. Economically and technologically, the nation has developed in parallel with the United States, its neighbor to the south across an unfortified border. As an affluent, high-tech, industrial society in the trillion-dollar class, Canada resembles the United States in its market-oriented economic system, pattern of production, and affluent living standards. Since World War II, the impressive growth of the manufacturing, mining, and service sectors has transformed the nation from a largely rural economy into a primarily industrial and urban country. The 1989 US–Canada Free Trade Agreement (FTA) and the 1994 North American Free Trade Agreement (NAFTA) (which includes Mexico) ignited a dramatic increase in trade and economic integration with the United States, its principle trading partner. Canada enjoys a substantial trade surplus with the United States, which absorbs nearly 80% of Canadian exports each year.
Economic Policy over 12 Months
Given its great natural resources, skilled labor force, and modern capital plant, Canada has enjoyed solid economic growth, and its prudent fiscal management produced consecutive balanced budgets from 1997 to 2007. In 2008, growth slowed sharply, down from 2.5% in 2007 to 1.8%, and the economy contracted in the fourth quarter as a result of the global economic downturn. Public finances, too, are set to deteriorate for the first time in a decade. Tight global credit conditions have further restrained business and housing investment, despite the conservative lending practices and strong capitalization that made Canada’s major banks among the strongest in the world.
In the budget for 2009, Canada’s Minister of Finance, James Flaherty, announced a stimulus package in line with the IMF’s recommendation that developed economies inject a minimum of 2% of GDP to counter the effects of the slowdown. The measures include infrastructure spending and efforts to ensure continued lending to businesses. To achieve this, the government is prepared to run a temporary budget deficit, and will, in effect, be speeding up planned infrastructure spending. As a result of the global slowdown, the Canadian economy is likely to contract by 0.8% in 2009, and it will incur a budget deficit of C$34 billion in this fiscal year, and a deficit of C$30 billion in fiscal 2010. However, the government does not foresee the deficit being long-running, as it will be in the United States, the United Kingdom, and elsewhere. Future surpluses will be used to pay down the debt incurred during the present recession, Flaherty said. By 2011, the government expects the deficit to fall to C$13 billion and to half again by 2012, with a return to a C$700 million surplus predicted for 2013. One of the initiatives planned is a C$2 billion fund to support economic diversification in communities affected by distress or decline in specific local industries, such as auto manufacture.
The Canadian remote regions—Atlantic Canada, Quebec and Western Canada—are traditionally affected first in any downturn, and the government has announced that it will provide support for regional economic development for these areas.
Some $C200 billion, part of an “Extraordinary Financing Framework,” will be made available to businesses to keep the economy moving. The present downturn should not obscure the fact that Canada’s handling of economic policy up to mid-2008 was defter and produced better results than any other G7 member. It was the only G7 country to record a fiscal surplus in 2006, and was in the strongest fiscal position of all G7 countries in 2007. By the end of 2006, the country’s real income per capita had risen by more than 20% compared to 2001, increasing by more than double the per capita GDP growth achieved by the United States.
Economic Performance over 12 Months
According to the IMF, the real GDP growth of 2.5% achieved by Canada in 2007 was driven largely by robust growth in Canada’s domestic demand, particularly in private consumption and residential investment, which saw a combined growth of close to 4%. The unemployment level fell below 6%. However, the global economic slowdown took its toll on growth through 2008. According to the Canadian office of statistics, Statistics Canada, the economy shrank by 3.4% in the fourth quarter of 2008, pulling the country into its deepest recession since the 1990s. Gross domestic product fell by 1% in December 2008, compared with November 2008. The contraction over the period October–December 2008 was the first time Canada’s economy had experienced a quarterly decline since the country’s last recession, in 1991–1992. At the same time, the agency also revised down its figures for GDP growth in the third quarter of 2008. Instead of 1.3%, as reported, the economy actually grew by only 0.9%, it said. Taking these corrections into account, the total growth for 2008 amounted to just 0.5%.
On the positive side, core inflation, which had been on the rise in the first half of 2007, began to show signs of declining in the second half of that year, despite the impact of rising fuel prices, and is predicted to continue to fall through 2009.
Canada’s current account surplus for 2006, and its track record of running surpluses came under pressure in 2007, with the external current-account surplus narrowing to just 1% of GDP as real net exports declined sharply. In part, this was due to volatility in the foreign-exchange markets, where the Canadian dollar appreciated rapidly, making Canada’s exports expensive. The Canadian dollar appreciated by 45%, in real, effective terms, over the period from 2002 to 2007. In response, the Bank of Canada reduced its policy rate to 4% in two consecutive cuts of 25 basis points in December 2007 and January 2008. As outlined under “Policy” above, the government now expects to run a deficit at least until 2013.
According to Statistics Canada, the country’s exports dropped by 4.7% in the fourth quarter of 2008, the deepest quarterly fall since export records began 60 years ago. As far as the balance of trade is concerned, this decline was more than offset by a fall in imports of 6.4%, as domestic demand weakened rapidly. Personal spending by Canadians also fell by 0.8%, the first time this had happened since the fourth quarter of 1995. Given these figures, both the federal government and the Bank of Canada officially declared that Canada went into recession during the fourth quarter of 2008. The prediction from the IMF is that the Canadian economy will continue to shrink in 2009, contracting by 1.2% over the year—a deeper recession than that predicted in Canada’s Budget for 2009. By comparison, Canada’s neighbor, the United States, saw its economy decline by 6.2% over the fourth quarter of 2008.
Support for Inward Investment and Imports
Invest in Canada was created by the federal government to promote, attract and retain foreign direct investment in Canada. It is a bureau of the Department of Foreign Affairs and International Trade and provides a range of services, including guidance on incentives, regulations and taxation.
Tax Exemptions
The Invest in Canada website has a guide to incentives and taxation for foreign investors.
Statistics
GDP growth: 0.5% (2008, Statistics Canada)
GDP per capita: US$40,200 (2008)
CPI: 3% (2008)
Key interest rate: 6.1% (December 31, 2007)
Exchange rate versus dollar: C$ per US dollar—1.0364 (2008)
Unemployment: 6.1% (2008)
FDI: C$586.6 billion
Current account deficit/surplus: −C$34 billion (2009, Canadian budget)
Population: 33,212,696 (July 2008)
Source: CIA World Factbook except where stated
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