October 13, 2010Economic Analysisby EconomyWatch

Canada Economic Analysis: A Resilient Economy

Canada has one of the most resilient economies amongst the developed nations. This stems both from a better regulated and less leveraged financial market, which did not allow debt levels to get out of hand, and from the depth of its natural resources. These are exported to the US, but also increasingly meet growing demands from China and other emerging markets. Although exports only form one third of the economy, the fact that financial markets are stable and exports haven't crumbled continue to support domestic spending.

Canada GDP growth
Canada's GDP grew 2.5 per cent in 2007 and edged up 0.4 per cent in 2008. Although the IMF in July 2009 predicted the 2009 GDP will contract 2.3 per cent, this is still the best performance of any G8 nation. It forecassts 1.6 per cent growth in 2010, double that of the US and better than any other G8 country except Japan. Note: Japan is expected to grow 1.7 per cent - but that is after a calamitous minus 6.0 per cent growth figre in 2009. Canada can therefore be considered to be the healthiest advanced economy in the world

Canada trade
Export figures have been rising for more than 5 years now. In 2008, total Canadian exports were estimated to be around $440 billion, a rise of about 8.76 percent over previous year export figure. US continues to be a dominant export partner for Canada accounting for more than 80 percent of its exports, although China is growing in importance. This figure is likely to drop in 2009, but only modestly. Total industrial output has dropped less than 10 per cent in the last 15 months, and is likely to start rising again before the end of 2009.

Why are Canadian exports doing much better than those of Japan, Germany and the like? It is because raw materials form the majority of its exports. Petroleum-based products, aluminium, lumber, finishing materials, sugar, precious metals and oil drilling equipment are all fairing better in the recession and will recover quicker. Although the automative industry is important, it is not dominant, and should continue to do well as it has a lower cost-base than the US automotive industry. Japan's exports are dominated by cars, hi-tech and 'white box' manufacturing, whereas Germany is dependent on cars and quality engineering - all categories that have been severely impacted.

Like exports, Canada import figures have also been registering growth for several years now. In 2008, total Canadian imports were estimated to be more than $390 billion, an improvement of more than 11.66 percent from previous year figure.

Canada economic analysis: Strengths and weaknesses
Canada's services sector is an economic strength of this nation, accounting for about two-thirds of its gross domestic product. Continued demand for raw materials and expected commodity price increases will support export-orientated industries.

Inflation (the Consumer Price Index or CPI) had dropped to 0.1% by May 2009 from a peak of 3.5% a year earlier. This was primarily due to lower energy prices. Excluding energy, the CPI rose 2.3%.

Interest rates are currently being held below 1% and the Canadian dollar has been strengthening against both the US dollar and Japanese Yen.

Canadian economic weakness could stem from twin deficits of -2.3 per cent in the budget, and -2.8 per cent in the current account balance, which the Economist forecasts will rise to -3.8 per cent and -1.7 per cent in 2010, as the costs of stimulus and lower government revenues are absorbed, before declining again thereafter. This will lead to net government debt rising from 21.5 per cent to over 35 per cent by 2013.

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