Abstract
This 2002 Article IV Consultation highlights that the Canadian economy has slowed substantially since late 2000. The slowdown in large part has reflected the slowing in the United States economy, which has reduced growth in Canada’s exports and contributed to weakening private investment. In addition, consumption growth has moderated, owing to a slowing in real income growth, a softening in the employment situation, and an associated fall in consumer confidence. The slowing in economic activity in recent quarters has also led to a decline in resource utilization.
1. This statement reports on information that has been made available since the staff report (SM/02/14, January 10, 2001) was issued. It does not change the thrust of the staff appraisal.
2. Recently released data suggest that the economy started to stabilize during the fourth quarter of 2001. Real GDP rose by 0.2 percent in November after rising by 0.3 percent in October. After declining sharply in the third quarter (partly related to the September 11 terrorist attacks), consumer and business confidence rose during the fourth quarter. In November, retail sales and manufacturing shipments were relatively robust, and data on new house prices and building permits indicate some strength in the housing market going forward. The composite leading indicator index increased by 0.4 percent in December, following a 0.2 percent increase in November.
3. At the same time, inflationary pressures remain well contained. Core CPI inflation fell slightly to 1.6 percent (12-month rate) in December, still below the mid-point of the Bank of Canada’s 1-3 percent target range. Total CPI inflation in December remained at 0.7 percent, in part reflecting continued low energy prices. Labor market conditions remain weak, with the unemployment rate rising to 8 percent in December 2001.
4. At its first policy announcement date in 2002 on January 15, the Bank of Canada cut its target for the overnight rate by 25 basis points, to 2 percent, bringing the total reduction over the past 12 months to 375 basis points. Subsequently, the Bank released a monetary policy report update which indicated that favorable recent geopolitical and economic developments increasingly point to the likelihood that economic growth in North America will gather significant momentum over the course of the year ahead. However, a major uncertainty for the outlook remains the timing and strength of the recovery in global business investment, especially in the United States.
5. The exchange rate of the Canadian dollar vis-à-vis the U.S. dollar has remained in the neighborhood of 62 U.S. cents in recent weeks, over 6 percent weaker than its level a year ago. The continuing exchange rate weakness has prompted public statements of support for the currency from senior leaders, including the Prime Minister, the Minister of Finance, and the Governor of the Bank of Canada. They noted that Canada’s strong economic fundamentals are not being fully taken into account in the foreign exchange market and should eventually be reflected in the currency in the period ahead.