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 principal 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
The government has adopted a looser fiscal policy to offset the impact of the global economic downturn. Thus, in the budget for 2009, Canada’s Minister of Finance, James Flaherty, announced a stimulus package in line with the International Monetary Fund’s (IMF) 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, and have resulted in a fiscal deficit.
The government maintained this policy in 2010. Indeed, much of the expenditure planned for 2009 was delayed and will now be disbursed in 2010. However, overall spending in 2010–11 will rise by 4.8% year on year, down from the rise of 12.1% posted in the previous fiscal year. The reviving economy will generate a recovery in tax revenues and, according to the medium-term budgetary framework, the budget should be in balance by 2014. Meanwhile, the government’s debt should fall from 35.2% of GDP in 2010 to 31.9% in 2014. Canada’s relatively low level of public debt, which is the lowest of all G7 economies, has given the government scope to increase public spending.
In the March 2010 budget, the government predicted that its deficit for the fiscal year ended March 31, 2010 would hit a record C$53.8 billion. With the first 10 months of the fiscal year complete, the shortfall stood at C$39.6 billion.
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.
The central bank slashed interest rates during the global economic slowdown, and in April 2009 pledged to keep the key rate at the record low of 0.25% for as long as was necessary. By April 2010, the interest rate was still at this level. However, economists expect monetary policy to tighten in 2010 as the economy continues to strengthen. In 2010, the Bank of Canada adopted a more relaxed approach to the currency than was the case in 2009 when it warned that currency strength could pose a risk to recovery.
Economic Performance over 12 Months
With 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. The recession continued during the first half of 2009, reflecting Canada’s close ties with the US economy. However, the economy emerged from recession in the third quarter and, in terms of severity, the 2008–09 recession was comparatively mild. Real GDP declined by 3.6% between the fourth quarter of 2008 and the second quarter of 2009.
Indeed, in April 2009, Statistics Canada said that Canada’s economic recession was not only shorter and milder than in other G7 countries, but was also less severe than Canada’s previous two downturns. The official statistics body added that one reason for the relatively mild slump was that Canada was better positioned to weather the global recession than other large western economies, primarily due to savings as reflected in its national balance sheet. Furthermore, the federal government reported the smallest monthly fiscal deficit in over a year in January 2010, indicating that the country’s public finances are improving.
The Canadian economy grew by 0.6% in January 2010, the fifth straight month of growth. Analysts expect it to expand by 5% in the first quarter of 2010 at an annual rate, matching the growth seen in the last quarter of 2009.
In terms of employment, the Canadian economy turned a corner in the fourth quarter of 2009, in which employment grew by 0.3%. The jobless rate increased from 6.1% in the third quarter of 2008 to 8.4% in the third quarter of 2009.
The strengthening economy is causing inflationary pressures to rise in 2010. The central bank’s measure of core inflation, which is normally considered a gauge of underlying price pressures because it excludes gasoline and other volatile items, rose to 2.1% in February, above the bank’s 2% target.
Canada recorded a current account deficit of C$41.3-billion, or 2.7% of GDP, in 2009. This was the first shortfall on the current account in more than a decade; yet financing the deficit was straightforward, as foreign portfolio managers bought C$109 billion worth of Canadian securities.
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.
The Invest in Canada website has a guide to incentives and taxation for foreign investors.
GDP growth: −2.5% (2009 est.)
GDP per capita: US$38,400 (2009 est.)
CPI: 0.2% (2009 est.)
Key interest rate: 0.25% (April 2010)
Exchange rate versus US dollar: C$1.1548 (2009)
Unemployment: 8.5% (2009 est.)
FDI: C$586.6 billion
Current account deficit/surplus: −US$36.32 billion (2009 est.)
Population: 33,759,742 (July 2010 est.)
Source: CIA World Factbook except where stated