Canada Economy

Canada has the 11th largest economy as ranked by nominal gross domestic product (GDP), and the 20th largest GDP per capita based on purchasing power parity (PPP). Canada is one of the world’s wealthiest nations and a member of the Organization for Economic Co-operation and Development (OECD) and Group of Seven (G7).

Canada has the 11th largest economy as ranked by nominal gross domestic product (GDP), and the 20th largest GDP per capita based on purchasing power parity (PPP). Canada is one of the world’s wealthiest nations and a member of the Organization for Economic Co-operation and Development (OECD) and Group of Seven (G7).

The service sector dominates the Canadian economy, which employs about 75 percent of the nation’s population. Canada is unique among developed nations due to the importance of its primary sector, with logging and oil being two of Canada’s most important industries. Canada also has a sizable manufacturing sector, which largely focuses on the automobile and aircraft industry. Canada has the eighth largest commercial fishing and seafood industry in the world and a well-developed technology sector that includes a world-leading entertainment software industry.

Economic History

Before the arrival of European settlers, Canada’s indigenous tribes had a well-established network of trade. When Europeans arrived in the 16th century, they began to exploit Canada’s abundant fur, timber, and fishing.

Before 1850, waterways were the backbone of the Canadian economy. The fur-trade expanded west thanks to the St. Lawrence River and the Great Lakes, and every product and industry depended on water for transport of goods. However, after 1850, wheat raising, mining, and pulp and paper became important industries and relied on rail transport.

Fishing and fur remained the chief products of Canada well into the 19th century. The mid-19th century saw the development of road and rail construction and the development of an industrial sector that coincided with an expansion in agricultural products. Steamships also became vital in this period and helped expand the lumber trade.

The climate of Canada kept population levels low and concentrated toward its southern borders. The discovery of gold along the west side of the North American continent led to a westward population migration in the 1870s. Land giveaways in the United States lured many Canadians across the border, further depleting much of the population. Westward migrating Canadians caused the population along the St. Lawrence River to swell.

Industrialization only really began in earnest in the beginning of the 20th century. This led to a period of rapid economic expansion. While the economy remained focused on primary products, the industrial sector began to have a greater impact on GDP. Unfortunately, this rate of growth would not last long, ending in 1914 with the onset of World War I.

The First World War created a short depression, followed by a shift to war production. After the war, Canada experienced a small post-war slump, then a period of great expansion during the 1920s. The American Great Depression spilled across the northern border and depressed Canada’s economy, as well, in the 1930s.

By the time of the Second World War, the economy of Canada had diversified somewhat, and it became a supplier of many of the products necessary for the war efforts. The turnaround brought about by the war was impressive. Unemployment all but disappeared by 1940, with the recruitment of soldiers and the conversion of industrial resources to military factories.

Following the war, Canada—left untouched by most of the conflict—experienced a 25-year period of immense economic expansion. Unemployment remained low and the industrial sector quickly returned to consumer goods production. This period also saw the birth of the Canadian welfare system, public health care, and a national retirement system.

In the 1980s, Canada experienced a recession and another in the 1990s. To combat this, the government engaged in deficit spending. An economic slump in 1995-1996 followed 1994’s brief recovery. After that, the link between the American and Canadian government grew closer, thanks to trade agreements such as the North American Free Trade Agreement (NAFTA). The country began a period of relative growth, with the economy performing largely in conformity with the United States. This led to Canada having a budget surplus every year from 1996 until the global recession of 2008.

Current Economic Situation

The Canadian economic system has elements of private and public enterprise. Canada has a private to public property ownership ratio of 60:40 and one of the highest levels of economic freedom in the world. Canada’s economy closely resembles the United States in its market-oriented economic system and pattern of production. As of February 2013, unemployment was at 7.0 percent following its recovery from the effects of the global recession.

International trade in Canada’s natural resources makes up a large part of its economy. In 2009, agricultural, energy, forestry and mining exports made up 58 percent of Canada’s total exports. Machinery, equipment, automotive products and other manufactured goods made up 38 percent of exports that year. America is Canada’s largest trading partner, accounting for 73 percent of exports and 63 percent of imports.

Primary products are slowly becoming less important to the Canadian economy. These primary industries only employ about 4 percent of Canadian and account for just 6.2 percent of GDP. Nevertheless, Canada remains a world leader in the production of many natural resources such as gold, nickel, uranium, diamonds, lead, and crude petroleum.

Economic Forecast

The OECD projects Canadian GDP to accelerate through 2015.  Rising exports, supported by foreign market recovery, should drive growth.  However, this growth will probably slow somewhat in 2016; as higher interest rates begin to take effect, consumption rates slow in proportion to household indebtedness. Inflation expects to rise to two percent in 2015.

The negative effects of the decline in oil prices will negatively affect Canada’s economy. The Bank of Canada has estimated that Canada’s export values will fall nine percent by the end of 2015, because of suppressed oil export values.

As has been the case for the last several decades, much of Canada’s recovery relies on the US economy. Because the US recovery has slowed in the first quarter of 2015, this may have a negative impact on Canadian growth. The Canadian Dollar has also strengthened recently, which will further cut into exports.

Growth for 2015 is forecast at 2.0 percent in 2015 and slightly larger at 2.2 percent in 2016.