Abstract
Canada has enjoyed high growth while adjusting smoothly to commodity price gains, currency appreciation, and, more recently, slowing U.S. demand. Monetary policy has appropriately shifted to guarding against increasing near-term downside risks. A sound fiscal framework policy has produced an enviably strong fiscal position that makes eliminating general government net debt feasible. The budgetary overperformance provides room for tax relief while maintaining small budget surpluses. To foster efficiency, the fiscal room should be used to reduce high marginal effective tax rates on capital, saving, and labor.
1. This note reports on recent developments since the staff report was issued. They do not alter the thrust of the staff appraisal.
2. Signs of slowing activity and inflation from weaker external conditions are emerging. Payroll employment fell 0.1 percent in November, real GDP growth decelerated to 0.1 percent from 0.2 percent the previous month, although strong retail sales suggest continued momentum in consumption. The leading indicator index fell in December, for the first time since 2001, housing starts dropped, and manufacturers expect to lower production and employment in the first quarter of 2008. Despite continuing strong wage growth, both headline and core inflation declined in December, the latter to 1.5 percent—the lowest rate in two years—likely reflecting continued exchange rate passthrough.
3. The Bank of Canada lowered its target for the overnight interest rate by 25 basis points to 4 percent at its January 22 meeting and adopted an easing bias. In the accompanying Monetary Policy Report Update, the Bank noted a further tightening in the prices, terms, and availability of credit in the last three months and a deteriorating outlook for the United States. The Bank also lowered Canadian real GDP growth projection for 2008 from 2.3 to 1.8 percent. The Bank noted the strong downward pressure on retail prices since the exchange rate against the U.S. dollar reached parity.
4. Staff revised down the growth rate projections for 2008 and 2009 in the January WEO Update. 2008 growth was revised from 2.0 to 1.8 percent and 2009 growth from 2.7 to 2.4 percent. The revision primarily reflects the downgrading of the staffs U.S. forecast, which exacerbates the drag from net exports, as well as the recent tightening of Canadian financial conditions. With the revision reflecting the realization of the downside risks specified in the Staff Report, the risks to the current forecast are now more balanced. Staff’s growth projections are: (i) somewhat below the January private sector consensus; (ii) in line with the Bank of Canada’s forecast for this year; (iii) but more pessimistic for 2009, with the Bank expecting a faster recovery both in Canada and in the United States.
5. Several major Canadian banks have announced significant further write-downs on their holdings of structured products, including ABCP, CDOs and RMBSs. These actions reflect both reductions in the value of underlying assets and the downgrading of some of the banks’ hedging counterparties (e.g., financial guarantors). Canadian banks are exposed to market turbulence through a variety of channels, including liquidity support commitments, participation in LBO transactions, and the management of SIVs. Still, they remain well capitalized. One of the banks has raised additional capital from domestic and international investors.
Canada: Selected Economic Indicators
(Annual change in percent, unless otherwise noted)
Contribution to growth.
In percent of GDP.
Includes local governments and hospitals.
Includes the balances of the Canada Pension Plan and Quebec Pension Plan.
Includes local governments and hospitals.
Canada: Selected Economic Indicators
(Annual change in percent, unless otherwise noted)
| Est. | Projections | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||
| Real GDP | 3.1 | 3.1 | 2.8 | 2.6 | 1.8 | 2.4 | |||
| Net exports 1/ | -1.0 | -1.7 | -1.4 | -1.1 | -1.7 | -0.2 | |||
| Final domestic demand | 4.1 | 4.5 | 4.7 | 3.8 | 3.2 | 2.6 | |||
| Private consumption | 3.4 | 3.8 | 4.2 | 4.1 | 2.9 | 2.3 | |||
| Public consumption | 2.5 | 2.2 | 3.3 | 3.1 | 2.8 | 2.3 | |||
| Private fixed domestic investment | 8.1 | 8.1 | 7.1 | 4.2 | 4.2 | 3.3 | |||
| Private investment rate 2/ | 17.8 | 18.4 | 19.2 | 19.7 | 20.3 | 20.6 | |||
| Public investment | 5.0 | 10.9 | 8.1 | 1.7 | 3.6 | 4.2 | |||
| Change in business inventories 1/ | 0.1 | 0.3 | -0.2 | 0.0 | 0.4 | 0.0 | |||
| GDP (at current prices) | 6.4 | 6.5 | 5.2 | 5.6 | 3.8 | 4.4 | |||
| Employment and inflation | |||||||||
| Unemployment rate | 7.2 | 6.8 | 6.3 | 6.0 | 6.4 | 6.3 | |||
| Consumer price index | 1.8 | 2.2 | 2.0 | 2.2 | 1.5 | 2.0 | |||
| GDP deflator | 3.2 | 3.4 | 2.4 | 3.0 | 1.9 | 2.0 | |||
| Exchange rate (period average) | |||||||||
| Real effective exchange rate | 5.5 | 6.1 | 5.9 | … | … | … | |||
| Nominal effective exchange rate | 6.2 | 7.0 | 6.8 | … | … | … | |||
| Bilateral exchange rate with United States | 7.7 | 7.5 | 6.8 | 6.0 | … | … | |||
| Level (in U.S. dollars) | 0.77 | 0.83 | 0.88 | 0.93 | … | … | |||
| Indicators of financial policies (national accounts basis) | |||||||||
| Federal fiscal balance 2/ | 0.8 | 0.1 | 0.6 | 0.4 | -0.1 | -0.2 | |||
| Provincial fiscal balance 2/3/ | -0.7 | 0.7 | -0.2 | -0.2 | 0.0 | 0.0 | |||
| General government 2/4/ | 0.8 | 1.6 | 1.0 | 0.8 | 0.5 | 0.4 | |||
| Net federal debt (public accounts basis) 2/ | 38.3 | 35.0 | 32.3 | 30.0 | 28.7 | 27.3 | |||
| General government net debt 2/5/ | 34.4 | 30.1 | 27.6 | 25.3 | 23.9 | 22.6 | |||
| Three-month treasury bill (in percent) | 2.2 | 2.7 | 4.0 | 4.2 | 3.3 | 3.4 | |||
| Ten-year government bond yield (in percent) | 4.6 | 4.1 | 4.2 | 4.3 | 3.8 | 4.0 | |||
| Balance of payments | |||||||||
| Current account balance 2/ | 2.3 | 2.0 | 1.6 | 1.0 | 0.2 | 0.1 | |||
| Merchandise trade balance 2/ | 5.1 | 4.6 | 3.5 | 3.3 | 2.1 | 1.9 | |||
| Export volume | 5.2 | 2.4 | 1.0 | 1.6 | -2.4 | 1.6 | |||
| Import volume | 8.8 | 8.1 | 5.2 | 5.1 | 2.9 | 2.5 | |||
| Invisibles balance 2/ | -2.8 | -2.6 | -1.9 | -2.3 | -1.9 | -1.8 | |||
| Saving and investment 2/ | |||||||||
| Gross national saving | 22.9 | 23.8 | 24.2 | 23.9 | 24.0 | 24.2 | |||
| General government | 3.3 | 4.4 | 4.0 | 3.7 | 3.4 | 3.3 | |||
| Private | 19.6 | 19.4 | 20.2 | 20.2 | 20.6 | 20.9 | |||
| Personal | 4.6 | 3.8 | 6.2 | 5.9 | 6.3 | 6.7 | |||
| Business | 14.9 | 13.9 | 14.0 | 14.2 | 14.3 | 14.3 | |||
| Gross domestic investment | 20.7 | 21.7 | 22.5 | 22.9 | 23.8 | 24.1 | |||
Contribution to growth.
In percent of GDP.
Includes local governments and hospitals.
Includes the balances of the Canada Pension Plan and Quebec Pension Plan.
Includes local governments and hospitals.
Canada: Selected Economic Indicators
(Annual change in percent, unless otherwise noted)
| Est. | Projections | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||
| Real GDP | 3.1 | 3.1 | 2.8 | 2.6 | 1.8 | 2.4 | |||
| Net exports 1/ | -1.0 | -1.7 | -1.4 | -1.1 | -1.7 | -0.2 | |||
| Final domestic demand | 4.1 | 4.5 | 4.7 | 3.8 | 3.2 | 2.6 | |||
| Private consumption | 3.4 | 3.8 | 4.2 | 4.1 | 2.9 | 2.3 | |||
| Public consumption | 2.5 | 2.2 | 3.3 | 3.1 | 2.8 | 2.3 | |||
| Private fixed domestic investment | 8.1 | 8.1 | 7.1 | 4.2 | 4.2 | 3.3 | |||
| Private investment rate 2/ | 17.8 | 18.4 | 19.2 | 19.7 | 20.3 | 20.6 | |||
| Public investment | 5.0 | 10.9 | 8.1 | 1.7 | 3.6 | 4.2 | |||
| Change in business inventories 1/ | 0.1 | 0.3 | -0.2 | 0.0 | 0.4 | 0.0 | |||
| GDP (at current prices) | 6.4 | 6.5 | 5.2 | 5.6 | 3.8 | 4.4 | |||
| Employment and inflation | |||||||||
| Unemployment rate | 7.2 | 6.8 | 6.3 | 6.0 | 6.4 | 6.3 | |||
| Consumer price index | 1.8 | 2.2 | 2.0 | 2.2 | 1.5 | 2.0 | |||
| GDP deflator | 3.2 | 3.4 | 2.4 | 3.0 | 1.9 | 2.0 | |||
| Exchange rate (period average) | |||||||||
| Real effective exchange rate | 5.5 | 6.1 | 5.9 | … | … | … | |||
| Nominal effective exchange rate | 6.2 | 7.0 | 6.8 | … | … | … | |||
| Bilateral exchange rate with United States | 7.7 | 7.5 | 6.8 | 6.0 | … | … | |||
| Level (in U.S. dollars) | 0.77 | 0.83 | 0.88 | 0.93 | … | … | |||
| Indicators of financial policies (national accounts basis) | |||||||||
| Federal fiscal balance 2/ | 0.8 | 0.1 | 0.6 | 0.4 | -0.1 | -0.2 | |||
| Provincial fiscal balance 2/3/ | -0.7 | 0.7 | -0.2 | -0.2 | 0.0 | 0.0 | |||
| General government 2/4/ | 0.8 | 1.6 | 1.0 | 0.8 | 0.5 | 0.4 | |||
| Net federal debt (public accounts basis) 2/ | 38.3 | 35.0 | 32.3 | 30.0 | 28.7 | 27.3 | |||
| General government net debt 2/5/ | 34.4 | 30.1 | 27.6 | 25.3 | 23.9 | 22.6 | |||
| Three-month treasury bill (in percent) | 2.2 | 2.7 | 4.0 | 4.2 | 3.3 | 3.4 | |||
| Ten-year government bond yield (in percent) | 4.6 | 4.1 | 4.2 | 4.3 | 3.8 | 4.0 | |||
| Balance of payments | |||||||||
| Current account balance 2/ | 2.3 | 2.0 | 1.6 | 1.0 | 0.2 | 0.1 | |||
| Merchandise trade balance 2/ | 5.1 | 4.6 | 3.5 | 3.3 | 2.1 | 1.9 | |||
| Export volume | 5.2 | 2.4 | 1.0 | 1.6 | -2.4 | 1.6 | |||
| Import volume | 8.8 | 8.1 | 5.2 | 5.1 | 2.9 | 2.5 | |||
| Invisibles balance 2/ | -2.8 | -2.6 | -1.9 | -2.3 | -1.9 | -1.8 | |||
| Saving and investment 2/ | |||||||||
| Gross national saving | 22.9 | 23.8 | 24.2 | 23.9 | 24.0 | 24.2 | |||
| General government | 3.3 | 4.4 | 4.0 | 3.7 | 3.4 | 3.3 | |||
| Private | 19.6 | 19.4 | 20.2 | 20.2 | 20.6 | 20.9 | |||
| Personal | 4.6 | 3.8 | 6.2 | 5.9 | 6.3 | 6.7 | |||
| Business | 14.9 | 13.9 | 14.0 | 14.2 | 14.3 | 14.3 | |||
| Gross domestic investment | 20.7 | 21.7 | 22.5 | 22.9 | 23.8 | 24.1 | |||
Contribution to growth.
In percent of GDP.
Includes local governments and hospitals.
Includes the balances of the Canada Pension Plan and Quebec Pension Plan.
Includes local governments and hospitals.