OVERVIEW
The Canadian economy has grown very rapidly over the past few quarters. Canada was the fastest-growing of the G7 countries in Q2.
The real GDP grew at 3.7% in Q1 and a spectacular 4.5% at a seasonally-adjusted annualized rate in Q2. Q2’s rapid growth was driven by an outstanding performance by the external sector. Export growth increased as the oil production picked up due to the higher prices of oil due to the decrease of oil supply by OPEC. The growth in Q2 was also driven by strong consumer spending. Canada’s unemployment rate falls to the lowest in close to nine years.
The unemployment rate as of October is at 6.3%.
The inflation rate was close to 2.2% in January 2017 and gradually decreased to about 1% in late June before picking up and reaching 1.6% in September and slowed down to 1.4% in October.
However, the GDP growth has slowed down and even shrank by 0.1% versus the estimate of 0.1% gain. It was the first monthly decline since 2016 and followed a flat reading in July.
The Bank of Canada projected GDP growth to reach 2.8% this year. The GDP growth for 2018 is projected to decline to 2.3%.
Canadian Economy in 2017
The various economic indicators namely GDP, Inflation rate, and Unemployment rate suggest Canada is in the expansion phase of the business cycle. However, there are a few troublesome signs that suggest Canada could be hit by a severe recession in the near future. GDP growth has been spectacular over the past few quarters and Canada’s economy is growing very rapidly. The unemployment continues to reduce over the past few years and is at an all-time low. The inflation rate has also slowed down to 1.4% as of October which suggests that Canada has still not yet hit the peak phase in the business cycle. Trade is a very crucial part of our economy as Canada is a resource-rich country. Foreign trade represents close to 53 percent of the Canadian GDP. NAFTA renegotiations and the changes to NAFTA or the United States withdrawal from NAFTA will be very detrimental to the economy of Canada. Trade has allowed Canadian consumers to buy products and services that cannot be produced in Canada or could only be provided at much higher prices. It has immensely helped Canadian producers access larger markets. From 1993 to 2015 real per-capita GDP grew 40 percent to US$50,000. All growth cannot be attributed to NAFTA; however, NAFTA has played a major role in the growth of Canada. If the United States withdrew from NAFTA it could possibly cause a recession as Canadian trade would be heavily impacted. The Canadian economy also contracted in August by 0.1%, suggesting signs of faster than expected cooling following the rapid growth in the first half of this year. This drop occurred due to weakness in the manufacturing sector which dropped by 1%. The mining, quarrying and oil and gas extraction sector fell by 0.8% in August. The Organization for Economic Cooperation and Development came out with a report on November 23rd, the OECD found Canada’s household debt to be ranked as the highest amount the 35 developing and developed countries. The household debt-to-GDP ratio had increased to 101% which is significantly higher than the other countries monitored by the group. The OECD has also suggested that the rapid accumulation of household debt could leave the economy vulnerable to shocks which would cause a severe recession.
Fiscal Policy Suggestion
Even though the Canadian economy in the first half of the year grew very rapidly, the economy contracted in August by 0.1%. Steve Keen, head of the school of economics at Kingston University London suggests that Canada is due for a debt crisis and a major recession. The Canadian government needs to be very cautious and try and introduce policies that would continue to help the economy expand rather than have the economy contract for another continuous quarter. We should introduce an expansionary fiscal policy which would help stimulate the economy and try and prevent a recession in the near future. The government should try and increase its spending and to build up the Canadian infrastructure, improve healthcare and also provide more basic facilities which would help stimulate the economy and also help the Canadian population. Even though the government has increased its spending on infrastructure since 2007, it’s not enough. Canada has choked roads, crumbling bridges, and inadequate public transit. Canada also needs to improve their health care system; the Canadian healthcare system seems very minimum as compared to the European countries. Even though Expansionary fiscal policy includes tax cuts at this point of time tax cuts needn’t have to be introduced. The Canadian economy has grown very rapidly over the first half of the year and the contraction could be temporary and tax cuts could cause the economy to grow at a very rapid pace which would not be sustainable.
Monetary Policy Suggestion
Interest rates should remain the same after the Bank of Canada raised the interest rate to 1% on September 6th. Tight money policy should not be implemented as it would lower the economic growth and would slow down an already slowed down rate of inflation. Lower economic growth could also add up and be disastrous if the United States retracted from NAFTA which would essentially cause a recession. The recession would be worsened due to the high household debt which could lead to a depression. Easy money policy would cause another housing bubble and would increase the household debt which could cause a depression due to a very high household debt-to-GDP ratio if the economy would go into recession. After the Bank of Canada raised the interest rate to 1%, the rate of inflation has slowed down and the housing bubble seems to have come to an end with the prices of houses dropping. If the economy continues to contract, easy money policy could be implemented so as to help stimulate the economy and grow the economy. Lower interest rates could be implemented to attract businesses to borrow more to invest in plants, equipment, and stock. This would eventually increase the money supply and spending which in turn increase GDP which would grow the economy and end to the contraction of the economy.
Impact of Stakeholders
Increase in government spending
Consumers will be positively benefited by an increase in government spending. Consumers will be benefited from a stronger infrastructure which would increase the efficiency by reducing traffic congestion and would also help the environment as people would start using public transit if it becomes more available and well connected. Government spending would also lead to an increase in job employment which would further help consumers. Businesses will be negatively impacted by government spending; the government essentially becomes a big competitor and many government programs are extremely well-funded which would make them look as a better option as compared to the other businesses. Investors could be affected by the stock prices dropping of the businesses that are being hurt by government spending. Exports and imports would not be heavily affected by an increase in government spending.
No tax cuts
None of the economic stakeholders would be impacted by no changes in taxes. Consumers and producers would be heavily benefited from tax cuts as it would lead to more money for individuals and also would increase consumer spending which would benefit the economy, however, very rapid growth would be unsustainable and could cause the Canadian economy to implode.
Interest rates remain the same
None of the economic stakeholders would be impacted by no changes in interest rates. Consumers and producers would be positively impacted by lower interest rates. If the interest rates are lowered at this point of time it would lead to a housing bubble and increase household debt. If the interest rate would be increased consumers and producers would be negatively impacted which would also lead to slower economic growth which could add to the contraction of the economy.
Challenges
Many economists will oppose increased government spending as it becomes a burden at some point because it becomes too large and outlays are misallocated. In those cases, the cost of government exceeds the benefits it provides. Government spending is also historically less effective as compared to the private sector. Government spending is also very inflexible because of centralization and bureaucracy. These are the challenges that would oppose the increase in government spending. The government should increase its spending in such a way it would not waste tax payer’s money and at the same time also be more flexible and competitive.
Conclusion
The Canadian economy has grown rapidly since the financial crisis in 2008. Oil and gas production in Canada has been a very important part of that rapid growth. However, oil and gas prices quickly dropped in 2014 causing the GDP to drop ever since. The government needs to try help the economy continue to grow but at the same time cannot drop interest rates which would cause household debt- to- GDP ratio to increase. The government needs to try and introduce specific fiscal policies rather than monetary policies as the Bank of Canada interest rate increase has reduced inflation and also has led to the housing bubble to burst. The government needs to act now in order to avoid a major recession that could become imminent in the next few years. A recession along with a very high household debt could possibly lead to depression. NAFTA would play a major role in how the Canadian economy will do and it would be in Canada’s best interests if more trading partners are established and not to rely on the United States to such great an extent. Canada needs to reach out to the ASEAN Free Trade Area and try to establish agreements to improve its trade which would improve the Canadian economy vastly.