Canada is among the leading tradingnations worldwide. It is known to have a strong economy. The paper willhighlight different microeconomic factors , evaluate the key macroeconomicindicators data and determine the fiscal and monetary policies for managinggrowth, inflation and unemployment, as well as provide and insight for thefuture economic growth in the country. GDP Rate Canada has been witnessing growth in theNormal GDP rate. In June 2017, the rate was reported with a growth of 6.23%,while it witnessed a decrease in September 2017, with a rate of 4.
88%. The highest rate was reported in September1974 at 20.64%, and the lowest in June 2009 at -7.69. This decrease was due tothe recession period. (Figure 1). (CEIC,2017)The Gross Domestic Product (GDP) hasalso been expanding in Canada.
Canada’s economy witnessed 3.0 % YoY expand inSep 2017. The highest was reported in March 1962 at 9.3 % and the year 1982witnessed the lowest record in December at -4.1 %. (CEIC, 2017)According to CEIC data base, Nominal GDPof Canada reached 428.0 USD bn in Sep 2017.
GDP deflator increased 1.9 % in Sep 2017 whileGDP Per Capita reached 42,901.7 USD in Jun 2017. The Gross Savings Rate wasmeasured at 23.
6 % in Sep 2017. (CEIC, 2017)Purchasing Power Parities (PPPs) representthe rates of currency exchange that balance the purchasing power of differentcurrencies by minimizing differences in price levels between countries.Estimates of PPP are based on the consumption rate rather than price value. (StatisticCanada)”The current GDP- per capita (PPP) rate in Canada is at anestimate of $46,400 in 2016, compared to $46300 in 2015, and $46300 in 2014″(CIA,World Fact Book).
There has been a pattern of increase for the GPD- Growth ratein Canada which seems to occur on annual basis.. Figure 3, illustrates thechanging rates from the year 1999 to 2013, and it proves consistency in therate increase. Inflationrate A 1.6 per cent rate ofinflation in September was followed by a 1.4 per cent in October.
The affluenceof the inflation rate in Canada mainly occurred because the gas price increase of6.5 percent y-o-y in October. Canada also witnessed a 14.1 per cent priceincrease in September according to figure shared by statistics Canada (CBCNews, 2017).The government of Canada statedthat the consumer price index increased due to the shelter and transportationprice increase that occurred in September and October at 3.
8 and 3 %consecutively. At the same time, Canada witnessed a deterioration in the clothingand footwear prices in 2017 compare to 2017. (CBC News, 2017)A rise in consumer prices forhousehold operations, furnishings and equipment occurred at a 0.2 per cent ratein the 12 months to October after a decline in the three previousmonths. In comparing 2016 to 2017, Clothing and footwear prices were down by1.
5 per cent in October, with the costof women’s clothing falling 4.6 per cent compared with a year ago (CBC News,2017).The Bank of Canada closelymonitored the three inflation measures for the purpose of setting monetarypolicy, Statistics Canada said the CPI-common reading for October recorded a 1.6 percent increase along with 1.
5 per cent increase in September. As a result , theCPI-median reading was at 1.7 per cent which is a short decline from 1.8 per cent, atthe same time CPI-trim remained constant at 1.5 per cent. (CBC News,2017)The inflation rate reported in2017at 1.
6 percent is still below the two percent target that the Bank ofCanada. The market watchers expects the situation to change and expect that thetarget will be reached in of 2018. TD senior economist James Marple explainedthe situation where he considers that the wage increase in the recent months alongwith the and full time job growth will aid in improving the situation. Thisimprovement, along with the depreciated Canadian dollar value and the stabilityof the energy prices, will set the stage for inflation to move toward two percent by the 2018. Reaching the two percent target is considered to becritical to reach stabilization for the economy of Canada (CBC News, 2017). Interest Rate The bank of Canada as part of itsfiscal policy, kept the interest rate constant at one percent in order to slow therise in the pace of inflation. The central bank said the unchanged interestrate is expected to boost the strength of the Canadian dollar (Blatchford,2017). Governmentsuse fiscal policy to determine expenditure, budget deficit, and interest rate.
Expansionary fiscal policy that is implemented by reducing tax rates andincreasing government spending shift the budget deficit function up. On theother hand, contractionary fiscal policy shifts the budget deficit functiondown (Ragan, 2014, pg. 807). The government of Canada uses the strategy ofincreasing the interest rates in Canada in order to invite investors toCanadian-dollar assets, and this will result in boosting its Canadian dollarvalue. (Bank of Canada, 2012)Poloz (Governor of The Bank ofCanada) sees that there is no need to increase the interest rate, as hebelieves the raise in wages will improve the inflation. On the other hand,David Dodge, who led the Canadian central bank between 2001 and 2008, doesnot agree with Poloz. He feels that Poloz needs to monitor closely the financialstability issue and raise the interest rates now since the economy is not reachingthe potential target. Dodge believes that if the government increase the interestrates by 1 percent, it will still be below the neutral the 3 per cent estimatedby the Bank of Canada.
He said that this increase is neither simulative norcontractionary. Dodge has some concerns that the interest rate should behigher, if Canada wants to aim for a balanced economy. (Argitis, 2017)Currency Exchange Rate”The exchange rate is the priceof one national currency, such as the Canadian dollar, expressed in terms ofanother currency, for example, the U.S.
dollar, or a basket of currencies”. (Bankof Canada, 2012)Canada has a flexible exchangerate system, where the exchange rate for the Canadian dollar against the U.S.dollar, and any other currency fluctuates and the demand for and supply determinesthe Canadian dollars in the foreign exchange market. Domestic and externalfactors affects the movements in the Canadian dollar. The world prices forcommodities and Canada’s status as a net exporter of raw materials comparedwith other countries, mainly the United States, as major importer, are examplesof these factor. Therefore, rising commodity prices will result in theescalation of the Canadian dollar against the U.S.
dollar. (Bankof Canada, 2012)Demand for Canadian productsdomestically and internationally have an effect on the Canadian currency. Astrong demand will support the value of the dollar and vice versa. Also, if Canada’s inflation rate werepersistently higher than that of the United States, will result in the depreciationof the dollar value in order to maintain the competitiveness of the exports inU.S. markets. (Bank of Canada, 2012)Figure 2 displays the current Canadianexchange rate against US Dollar and European Euro.
Monetary PolicyIn Canada, the central bankimplements a set of policies that the amount of money circulated in theeconomy. The monetary policy is implemented by adjusting interest rates toreach a rate of monetary expansion to stabilize inflation. (bankofcanada.ca)The monetary policy in Canada hasthree main characteristics. First isthat it is led by the Bank of Canada, a government-owned Crown corporation thatoperates with considerable independence from the federal government. Second,interest rates on similar assets are the same across all Canadian regions dueto the fact that financial capital can move easily within Canada. This resultsin having only one monetary policy for all of Canada in which The Bank ofCanada is the only issuer of legal tender (bank notes) in Canada. The lastcharacteristic is that despite of the fact that different economic variablesinfluence monetary policy decisions, the Bank of Canada has only one policyinstrument.
(bankofcanada.ca)The Bank’s policy instrument isthe target that the bank sets for the overnight interestrate. In Canada, commercial banks borrow funds from each other for veryshort periods at the overnight interest rate which fluctuates daily. By broadcastinga specific interest rate (25 basis points above the target overnight rate) atwhich it is prepared to lend unlimited amounts to commercial banks and a secondspecific interest rate (25 basis points below the target overnight rate) atwhich it is prepared to borrow unlimited amounts from commercial banks, theBank of Canada maintains the overnight interest rate within an broadcastedoperating band. Additionally, by changing its target for theovernight interest rate, the Bank of Canada can modify the actual overnightrate at which commercial banks transact. (bankofcanada.
ca) By altering the target for the overnight rate,the Bank creates an impact on the range of market interest rates, from theyield on 30-day treasury bills to that on 30-year government bonds, and fromthe rate on 3-month guaranteed investment certificates (GICs) to that on10-year home mortgages. When the Bank lowers the target for the overnight rate,these interest rates fall, firms and households increase their demand forcredit, and commercial banks increase their quantity of credit supplied. On thecontrary, when the Bank increase the target, interest rates increase, firms andhouseholds decrease their demand for credit, and commercial banks reduce theiramount of credit supplied.
(bankofcanada.ca)While the amount of creditincrease, the volume of transactions for goods and services increase, resultingin an increase in the overall demand for money needed to make thesetransactions. Individual firms and households fulfil their demand for money bywithdrawing funds from their accounts at commercial banks, often in the form ofbank notes. Also, when commercial banks run short of bank notes, they sellassets—in particular, government securities, to buy bank notes from the Bank ofCanada. By purchasing government securities, the Bank of Canada increases thevolume of bank notes in the economy to satisfy the greater demand fromcommercial banks. This will result in increase in assets (governmentsecurities) and liabilities (bank notes). (bankofcanada.ca)Unemployment Canada’s witnessed a decrease in the unemploymentRate between November and October 2017, the rate dropped to 5.
90 % from 6.30 % .The monthly Earnings of Canada reached the rate of 3,211.83 USD in Sep 2017,while the Labour Force Participation Rate dropped to 65.40 % in Nov 2017.(CEIC, 2017). The current Canadian unemployment rate of 6.5% is marginallyabove NAIRU.
(Figure 4)Fiscal and Minatory PoliciesFiscal policy is the use of the governmenttax and spending policies to achieve government objectives, and monetary policystimulates the aggregate demand through monetary transmission mechanism.Expansionary monetary policy involves reducing tax rates which lead toexpansion of aggregate demand (Ragan, 2014, pg. 727).Different approaches have been followedby the government of Canada the government in order to support its economicgrowth.
For example, investing in infrastructure, tax cut for the middle class andadjustments to the Canada Child Benefit. Reducing the tax rate and increasingthe spending by the government has reflected an expansionary monetary which isleading according to the government to economic growth. BusinessCycle The business cycle is used identify the improvementand the decline of the economy over time. Figure 5, illustrates the businesscycle in Canada from 1871 to 2017 in terms of the change in GDP. Thegrowth of the economy is represented by a wave-type pattern of expansionsand contractions.
During the financial crisis of 2008/2009, Canada witnessed acontraction, and since 2009 there has been some improvements that resulted in anexpansion in the business cycle. The proper management of the business cycle eliminatesthe fluctuation between expansion and contraction. This is usually accomplishedby the proper implementation of the fiscal and monetary policies by thegovernment. Inflation in Canada”The Bank of Canada follows a strategy of keeping domestic inflation low,stable, and predictable, which contributes not only to the long-term soundnessof the Canadian dollar, but to the overall health of the economy” (Bank ofCanada). Comparing it to the rest of the world, Canada’s inflation rate isconsidered to be progressing at a good rate. The rise and fall in prices aidsto balance the inflation rate.
When the price of oil and gas dropped, food andhousing prices increased and this balanced the inflation rate. (Statista) FutureOutlookThe Organization for Economic Co-operationand Development suggested that Canada is going to witness an economic growth in2018. The Paris-based economic thinktank stated that there is 3.2 growth rate expected for the Canadian economy. Onthe other hand, The OECD thinks that the growth rate will stay at its 2.3 percent. (The Canadian Press)The inflation rate is expected to increase from 1.6%in 2017 to 1.
79% in 2018, and reach a high of 2.06% in 2019, only to startdecreasing and reach 1.9% in 2022 due to the increase in price and consumer spending(figure 6).
The unemployment rate is expected to slightly decreases in theyears to come and range between 6.22% and 6.35%. (Figure 7). There is a debate occurring on whether Canada is going to faceanother recession in the years ahead. Some observers highlight that the slopeof the yield curve of government bonds remains distinctly positive whichimplies that there is a very little chance of recession. Others point to theshort age of the current expansion in arguing that there is a much higherpossibility of recession. As the current Canadian unemployment rate of 6.
5% ismarginally above NAIRU6 , the historical probability of recession is only 3%within a year and 13% within three years. (Arseneau & Paquet, 2017)