Abstract
The staff report on Canada’s 2009 Article IV Consultation examines economic developments and policies. Canadian banks have weathered the crisis better than major-country peers, but the credit cycle will be challenging, particularly given high household debt. Financial instability is a tail risk, but heightened vigilance is warranted. The Bank of Canada has appropriately loosened monetary policy, bringing the policy rate target to a record-low ½ percent. Macroeconomic policies have adopted an expansionary tilt, and authorities have taken steps to safeguard financial stability.
May 11, 2009
1. This statement reports on developments since the staff report was issued. They do not alter the thrust of the staff appraisal.
2. Recent indicators point to a continued, but moderating, contraction. Real GDP declined by 0.1 percent in February compared with an 0.7 percent fall in January, mostly reflecting lower production in good-producing industries, such as construction. The unemployment rate rose to 8 percent in March—a seven-year high—although the pace of job losses eased from February. The Bank of Canada’s Spring Business Outlook Survey reported widespread expectations of slowing sales, but the balance of opinion was slightly less pessimistic than in the prior survey. Housing starts and sales recovered in March on low home prices and interest rates, albeit from weak levels, while non-residential construction declined. Headline inflation decelerated from 1.4 percent to 1.2 percent (y/y) in March, with core inflation registering 2 percent. Medium-term inflation expectations, as reflected in the April Consensus Economic survey, remain anchored to the Bank’s 2-percent target.
3. On April 21, the Bank of Canada lowered its target for the overnight interest rate by 25 basis points to ¼ percent, and its April 23rd Monetary Policy Report laid out a framework for conducting monetary policy at low interest rates. In conjunction with its rate cut, the Bank noted that the target rate could be expected to remain at its current level until the end of the second quarter of 2010, conditional on the inflation outlook. The Bank also lengthened its repo facilities to a maximum maturity of one year. The framework described less conventional tools, such as quantitative and credit easing, that could be deployed in future. It elaborated guiding principles for the conduct of policy, namely a focus on achieving the inflation target, maximum economic impact, neutrality across sectors and assets, and prudence with regard to risks to the Bank’s balance sheet. The need for further measures would be assessed at each monetary policy meeting. The Bank lowered its projections for Canadian growth from -1.2 to -3 percent for 2009 and from 3.8 to 2.5 percent for 2010, with risks to growth balanced and risks to inflation on the downside.
4. On the basis of recent data, staff has left the growth projection for 2009 broadly unchanged. Staff’s growth projection for 2009 (-2½ percent, year-over-year) are between the latest Bank of Canada forecast (-3 percent) and the April consensus (-2.3 percent). Staff’s projection for 2010 remains 1.2 percent, well below Bank of Canada and Consensus forecasts, mainly on expectations of a slower U.S. recovery.
5. Budget implementation is on track, with recent fiscal data more favorable than anticipated. Most of the funds for Budget 2009 have been appropriated and spending will come on stream this quarter, as planned. Data for the first 11 months of the fiscal year 2008/09 (i.e., April 2008 to February 2009) indicate a surplus of C$1.3 billion (less than one-tenth of 1 percent of GDP), compared to a small deficit estimated in the January Budget, on stronger than expected personal and other income taxes.
6. Financial conditions remain more favorable than elsewhere, but credit conditions are still tight. Major Canadian banks have raised preferred shares in recent weeks, but have reported ongoing credit losses. The latest Bank of Canada Loan Officer Survey shows that the pricing and availability of business credit tightened further in 2009Q1, albeit at a slower pace than in 2008Q4. Credit spreads remain elevated, while stock prices have been volatile, echoing volatility in global equity and commodities markets.
Canada: Selected Economic Indicators (concluded)
(In percent change, unless otherwise indicated)
Contribution to growth.
Not seasonally adjusted.
Includes local governments and hospitals.
Canada: Selected Economic Indicators (concluded)
(In percent change, unless otherwise indicated)
| Projections | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||
| National Accounts in constant prices | |||||||||||||||
| Real GDP | 3.1 | 2.7 | 0.5 | -2.5 | 1.2 | 2.5 | 3.8 | 3.4 | 2.5 | ||||||
| Q4/Q4 | 2.2 | 2.8 | -0.7 | -1.9 | 1.7 | 3.1 | 4.0 | 3.0 | 2.2 | ||||||
| Net exports 1/ | -1.3 | -1.5 | -1.9 | 0.4 | -0.1 | 0.3 | 0.3 | 0.3 | 0.3 | ||||||
| Total domestic demand | 4.7 | 4.3 | 2.4 | -3.2 | 1.3 | 2.2 | 3.6 | 3.1 | 2.2 | ||||||
| Final domestic demand | 4.8 | 4.2 | 2.5 | -2.8 | 1.2 | 2.2 | 3.6 | 3.2 | 2.3 | ||||||
| Private consumption | 4.3 | 4.5 | 3.0 | -2.3 | 0.7 | 2.4 | 3.8 | 3.3 | 2.0 | ||||||
| Public consumption | 3.8 | 3.7 | 3.4 | 2.1 | 2.6 | 1.9 | 2.0 | 2.1 | 2.2 | ||||||
| Private fixed domestic investment | 7.1 | 3.4 | 0.0 | -11.1 | -0.3 | 2.9 | 5.1 | 4.0 | 3.3 | ||||||
| Machinery and equipment | 10.6 | 7.1 | 2.0 | -15.2 | 0.1 | 3.5 | 5.9 | 5.1 | 4.6 | ||||||
| Residential construction | 2.2 | 3.0 | -2.9 | -15.0 | -1.2 | 2.5 | 4.4 | 3.3 | 2.3 | ||||||
| Private investment (in percent of GDP) | 19.5 | 19.6 | 19.4 | 18.6 | 18.1 | 18.1 | 18.3 | 18.4 | 18.6 | ||||||
| Public investment | 6.7 | 7.8 | 5.7 | 10.4 | 8.9 | -1.8 | 2.5 | 2.5 | 2.4 | ||||||
| Change in inventories 1/ | -0.1 | 0.1 | -0.1 | -0.4 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| GDP (current prices) | 5.7 | 5.9 | 4.4 | -3.9 | 2.5 | 4.0 | 5.9 | 5.6 | 4.8 | ||||||
| Employment and inflation | |||||||||||||||
| Unemployment rate (percent) | 6.3 | 6.0 | 6.2 | 8.4 | 8.8 | 8.0 | 6.3 | 6.2 | 6.1 | ||||||
| Employment | 1.9 | 2.3 | 1.5 | -2.2 | 0.9 | 2.6 | 3.4 | 1.6 | 1.5 | ||||||
| CPI inflation | 2.0 | 2.1 | 2.4 | 0.0 | 0.5 | 1.4 | 2.1 | 2.4 | 2.1 | ||||||
| Core CPI inflation (y/y) | 1.9 | 2.1 | 1.7 | 1.3 | 0.4 | 0.8 | 1.7 | 2.2 | 2.0 | ||||||
| GDP deflator | 2.5 | 3.1 | 3.8 | -1.4 | 1.3 | 1.5 | 2.0 | 2.2 | 2.3 | ||||||
| Potential output growth | 2.3 | 2.3 | 2.2 | 1.7 | 1.6 | 1.6 | 1.7 | 1.9 | 2.0 | ||||||
| Output gap (in percent of potential output) | 1.1 | 1.5 | -0.2 | -4.3 | -4.7 | -3.9 | -2.0 | -0.5 | 0.0 | ||||||
| Indicators of fiscal policies | |||||||||||||||
| (NA basis, in percent of GDP) | |||||||||||||||
| Federal fiscal balance | 0.7 | 1.0 | 0.2 | -2.0 | -2.4 | -1.6 | -0.9 | -0.5 | 0.0 | ||||||
| Provincial fiscal balance 3/ | -0.2 | -0.3 | -0.4 | -1.8 | -1.5 | -1.1 | -0.6 | -0.2 | 0.2 | ||||||
| General government fiscal balance 3/ | 1.3 | 1.4 | 0.4 | -3.4 | -3.6 | -2.3 | -1.2 | -0.4 | 0.4 | ||||||
| General government net debt | 26.4 | 23.2 | 21.9 | 26.2 | 29.1 | 30.3 | 29.8 | 28.6 | 26.8 | ||||||
| Three-month treasury bill (percent) | 4.0 | 4.2 | 2.4 | 0.5 | 0.6 | 2.6 | 4.3 | 4.8 | 4.8 | ||||||
| Ten-year government bond yield (percent) | 4.2 | 4.3 | 3.6 | 2.7 | 2.8 | 4.2 | 5.2 | 5.5 | 5.5 | ||||||
| External indicators | |||||||||||||||
| Current account balance (in percent of GDP) | 1.4 | 0.9 | 0.6 | -0.9 | -0.7 | -0.3 | 0.1 | 0.4 | 0.9 | ||||||
| Merchandise trade balance (in percent of GDP) | 3.4 | 3.1 | 2.9 | 1.1 | 1.5 | 1.8 | 2.1 | 2.2 | 2.6 | ||||||
| Export volume | 0.9 | 1.4 | -5.0 | -14.5 | 0.6 | 4.2 | 5.3 | 4.7 | 4.3 | ||||||
| Import volume | 5.0 | 5.4 | 1.0 | -16.0 | 1.3 | 3.8 | 5.1 | 4.4 | 3.9 | ||||||
| Balance on invisibles (in percent of GDP) | -2.0 | -2.2 | -2.3 | -2.0 | -2.2 | -2.1 | -1.9 | -1.8 | -1.7 | ||||||
| Terms of trade | 0.6 | 3.0 | 4.7 | -7.6 | 1.9 | 0.5 | 0.3 | 0.1 | 0.9 | ||||||
| Saving and investment (in percent of GDP) | |||||||||||||||
| Gross national saving | 24.3 | 24.1 | 23.7 | 21.6 | 21.6 | 21.9 | 22.4 | 22.8 | 23.4 | ||||||
| General government | 4.3 | 4.5 | 3.7 | 0.5 | 0.6 | 1.7 | 2.7 | 3.6 | 4.4 | ||||||
| Private | 20.0 | 19.7 | 20.0 | 21.1 | 21.1 | 20.1 | 19.6 | 19.2 | 19.0 | ||||||
| Personal | 4.7 | 4.5 | 5.2 | 7.6 | 7.8 | 6.6 | 5.8 | 5.3 | 5.1 | ||||||
| Business | 15.4 | 14.7 | 14.9 | 13.5 | 13.3 | 13.5 | 13.8 | 13.9 | 13.9 | ||||||
| Gross domestic investment | 22.9 | 23.3 | 23.0 | 22.5 | 22.3 | 22.1 | 22.3 | 22.4 | 22.5 | ||||||
| Personal Savings (in percent of DI) | 3.1 | 2.7 | 3.7 | 6.0 | 6.2 | 5.7 | 5.4 | 5.4 | 5.3 | ||||||
| Memorandum item | |||||||||||||||
| Real GDP in United States | 2.8 | 2.0 | 1.1 | -2.8 | 0.0 | 3.6 | 3.7 | 3.3 | 2.4 | ||||||
Contribution to growth.
Not seasonally adjusted.
Includes local governments and hospitals.
Canada: Selected Economic Indicators (concluded)
(In percent change, unless otherwise indicated)
| Projections | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||
| National Accounts in constant prices | |||||||||||||||
| Real GDP | 3.1 | 2.7 | 0.5 | -2.5 | 1.2 | 2.5 | 3.8 | 3.4 | 2.5 | ||||||
| Q4/Q4 | 2.2 | 2.8 | -0.7 | -1.9 | 1.7 | 3.1 | 4.0 | 3.0 | 2.2 | ||||||
| Net exports 1/ | -1.3 | -1.5 | -1.9 | 0.4 | -0.1 | 0.3 | 0.3 | 0.3 | 0.3 | ||||||
| Total domestic demand | 4.7 | 4.3 | 2.4 | -3.2 | 1.3 | 2.2 | 3.6 | 3.1 | 2.2 | ||||||
| Final domestic demand | 4.8 | 4.2 | 2.5 | -2.8 | 1.2 | 2.2 | 3.6 | 3.2 | 2.3 | ||||||
| Private consumption | 4.3 | 4.5 | 3.0 | -2.3 | 0.7 | 2.4 | 3.8 | 3.3 | 2.0 | ||||||
| Public consumption | 3.8 | 3.7 | 3.4 | 2.1 | 2.6 | 1.9 | 2.0 | 2.1 | 2.2 | ||||||
| Private fixed domestic investment | 7.1 | 3.4 | 0.0 | -11.1 | -0.3 | 2.9 | 5.1 | 4.0 | 3.3 | ||||||
| Machinery and equipment | 10.6 | 7.1 | 2.0 | -15.2 | 0.1 | 3.5 | 5.9 | 5.1 | 4.6 | ||||||
| Residential construction | 2.2 | 3.0 | -2.9 | -15.0 | -1.2 | 2.5 | 4.4 | 3.3 | 2.3 | ||||||
| Private investment (in percent of GDP) | 19.5 | 19.6 | 19.4 | 18.6 | 18.1 | 18.1 | 18.3 | 18.4 | 18.6 | ||||||
| Public investment | 6.7 | 7.8 | 5.7 | 10.4 | 8.9 | -1.8 | 2.5 | 2.5 | 2.4 | ||||||
| Change in inventories 1/ | -0.1 | 0.1 | -0.1 | -0.4 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||
| GDP (current prices) | 5.7 | 5.9 | 4.4 | -3.9 | 2.5 | 4.0 | 5.9 | 5.6 | 4.8 | ||||||
| Employment and inflation | |||||||||||||||
| Unemployment rate (percent) | 6.3 | 6.0 | 6.2 | 8.4 | 8.8 | 8.0 | 6.3 | 6.2 | 6.1 | ||||||
| Employment | 1.9 | 2.3 | 1.5 | -2.2 | 0.9 | 2.6 | 3.4 | 1.6 | 1.5 | ||||||
| CPI inflation | 2.0 | 2.1 | 2.4 | 0.0 | 0.5 | 1.4 | 2.1 | 2.4 | 2.1 | ||||||
| Core CPI inflation (y/y) | 1.9 | 2.1 | 1.7 | 1.3 | 0.4 | 0.8 | 1.7 | 2.2 | 2.0 | ||||||
| GDP deflator | 2.5 | 3.1 | 3.8 | -1.4 | 1.3 | 1.5 | 2.0 | 2.2 | 2.3 | ||||||
| Potential output growth | 2.3 | 2.3 | 2.2 | 1.7 | 1.6 | 1.6 | 1.7 | 1.9 | 2.0 | ||||||
| Output gap (in percent of potential output) | 1.1 | 1.5 | -0.2 | -4.3 | -4.7 | -3.9 | -2.0 | -0.5 | 0.0 | ||||||
| Indicators of fiscal policies | |||||||||||||||
| (NA basis, in percent of GDP) | |||||||||||||||
| Federal fiscal balance | 0.7 | 1.0 | 0.2 | -2.0 | -2.4 | -1.6 | -0.9 | -0.5 | 0.0 | ||||||
| Provincial fiscal balance 3/ | -0.2 | -0.3 | -0.4 | -1.8 | -1.5 | -1.1 | -0.6 | -0.2 | 0.2 | ||||||
| General government fiscal balance 3/ | 1.3 | 1.4 | 0.4 | -3.4 | -3.6 | -2.3 | -1.2 | -0.4 | 0.4 | ||||||
| General government net debt | 26.4 | 23.2 | 21.9 | 26.2 | 29.1 | 30.3 | 29.8 | 28.6 | 26.8 | ||||||
| Three-month treasury bill (percent) | 4.0 | 4.2 | 2.4 | 0.5 | 0.6 | 2.6 | 4.3 | 4.8 | 4.8 | ||||||
| Ten-year government bond yield (percent) | 4.2 | 4.3 | 3.6 | 2.7 | 2.8 | 4.2 | 5.2 | 5.5 | 5.5 | ||||||
| External indicators | |||||||||||||||
| Current account balance (in percent of GDP) | 1.4 | 0.9 | 0.6 | -0.9 | -0.7 | -0.3 | 0.1 | 0.4 | 0.9 | ||||||
| Merchandise trade balance (in percent of GDP) | 3.4 | 3.1 | 2.9 | 1.1 | 1.5 | 1.8 | 2.1 | 2.2 | 2.6 | ||||||
| Export volume | 0.9 | 1.4 | -5.0 | -14.5 | 0.6 | 4.2 | 5.3 | 4.7 | 4.3 | ||||||
| Import volume | 5.0 | 5.4 | 1.0 | -16.0 | 1.3 | 3.8 | 5.1 | 4.4 | 3.9 | ||||||
| Balance on invisibles (in percent of GDP) | -2.0 | -2.2 | -2.3 | -2.0 | -2.2 | -2.1 | -1.9 | -1.8 | -1.7 | ||||||
| Terms of trade | 0.6 | 3.0 | 4.7 | -7.6 | 1.9 | 0.5 | 0.3 | 0.1 | 0.9 | ||||||
| Saving and investment (in percent of GDP) | |||||||||||||||
| Gross national saving | 24.3 | 24.1 | 23.7 | 21.6 | 21.6 | 21.9 | 22.4 | 22.8 | 23.4 | ||||||
| General government | 4.3 | 4.5 | 3.7 | 0.5 | 0.6 | 1.7 | 2.7 | 3.6 | 4.4 | ||||||
| Private | 20.0 | 19.7 | 20.0 | 21.1 | 21.1 | 20.1 | 19.6 | 19.2 | 19.0 | ||||||
| Personal | 4.7 | 4.5 | 5.2 | 7.6 | 7.8 | 6.6 | 5.8 | 5.3 | 5.1 | ||||||
| Business | 15.4 | 14.7 | 14.9 | 13.5 | 13.3 | 13.5 | 13.8 | 13.9 | 13.9 | ||||||
| Gross domestic investment | 22.9 | 23.3 | 23.0 | 22.5 | 22.3 | 22.1 | 22.3 | 22.4 | 22.5 | ||||||
| Personal Savings (in percent of DI) | 3.1 | 2.7 | 3.7 | 6.0 | 6.2 | 5.7 | 5.4 | 5.4 | 5.3 | ||||||
| Memorandum item | |||||||||||||||
| Real GDP in United States | 2.8 | 2.0 | 1.1 | -2.8 | 0.0 | 3.6 | 3.7 | 3.3 | 2.4 | ||||||
Contribution to growth.
Not seasonally adjusted.
Includes local governments and hospitals.