Canada growth of 6.23%, while it witnessed a

Canada is among the leading trading
nations worldwide. It is known to have a strong economy. The paper will
highlight different microeconomic factors , evaluate the key macroeconomic
indicators data and determine the fiscal and monetary policies for managing
growth, inflation and unemployment, as well as provide and insight for the
future economic growth in the country.

GDP Rate

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Canada has been witnessing growth in the
Normal 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 September
1974 at 20.64%, and the lowest in June 2009 at -7.69. This decrease was due to
the recession period.  (Figure 1). (CEIC,
2017)

The Gross Domestic Product (GDP) has
also been expanding in Canada. Canada’s economy witnessed 3.0 % YoY expand in
Sep 2017. The highest was reported in March 1962 at 9.3 % and the year 1982
witnessed the lowest record in December at -4.1 %. (CEIC, 2017)

According to CEIC data base, Nominal GDP
of Canada reached 428.0 USD bn in Sep 2017.  GDP deflator increased 1.9 % in Sep 2017 while
GDP Per Capita reached 42,901.7 USD in Jun 2017. The Gross Savings Rate was
measured at 23.6 % in Sep 2017. (CEIC, 2017)

Purchasing Power Parities (PPPs) represent
the rates of currency exchange that balance the purchasing power of different
currencies by minimizing differences in price levels between countries.
Estimates of PPP are based on the consumption rate rather than price value. (Statistic
Canada)

“The current  GDP- per capita (PPP) rate in Canada is at an
estimate 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 rate
in Canada which seems to occur on annual basis.. Figure 3, illustrates the
changing rates from the year 1999 to 2013, and it proves consistency in the
rate increase.

Inflation
rate

A 1.6 per cent rate of
inflation in September was followed by a 1.4 per cent in October. The affluence
of the inflation rate in Canada mainly occurred because the gas price increase of
6.5 percent y-o-y in October. Canada also witnessed a 14.1 per cent price
increase in September according to figure shared by statistics Canada (CBC
News, 2017).

The government of Canada stated
that the consumer price index increased due to the shelter and transportation
price increase that occurred in September and October at 3.8 and 3 %
consecutively. At the same time, Canada witnessed a deterioration in the clothing
and footwear prices in 2017 compare to 2017. (CBC News, 2017)

A rise in consumer prices for
household operations, furnishings and equipment occurred at a 0.2 per cent rate
in the 12 months to October after a decline in the three previous
months. In comparing 2016 to 2017, Clothing and footwear prices were down by
1.5 per cent  in October, with the cost
of women’s clothing falling 4.6 per cent compared with a year ago (CBC News,
2017).

The Bank of Canada closely
monitored the three inflation measures for the purpose of setting monetary
policy, Statistics Canada said the CPI-common reading for October recorded a 1.6 per
cent increase along with 1.5 per cent increase in September. As a result , the
CPI-median reading was at 1.7 per cent which  is a short decline from 1.8 per cent, at
the same time CPI-trim remained constant  at 1.5 per cent. (CBC News,
2017)

The inflation rate reported in
2017at 1.6 percent is still below the two percent target that the Bank of
Canada. The market watchers expects the situation to change and expect that the
target will be reached in of 2018.  TD senior economist James Marple explained
the situation where he considers that the wage increase in the recent months along
with the and full time job growth will aid in improving the situation. This
improvement, along with the depreciated Canadian dollar value and the stability
of the energy prices, will set the stage for inflation to move toward two per
cent by the 2018. Reaching the two percent target is considered to be
critical to reach stabilization for the economy of Canada (CBC News, 2017).

Interest Rate

The bank of Canada as part of its
fiscal policy, kept the interest rate constant at one percent in order to slow the
rise in the pace of inflation. The central bank said the unchanged interest
rate is expected to boost the strength of the Canadian dollar (Blatchford,
2017).

Governments
use fiscal policy to determine expenditure, budget deficit, and interest rate.
Expansionary fiscal policy that is implemented by reducing tax rates and
increasing government spending shift the budget deficit function up. On the
other hand, contractionary fiscal policy shifts the budget deficit function
down (Ragan, 2014, pg. 807). The government of Canada uses the strategy of
increasing the interest rates in Canada in order to invite investors to
Canadian-dollar assets, and this will result in boosting its Canadian dollar
value. (Bank of Canada, 2012)

Poloz (Governor of The Bank of
Canada) sees that there is no need to increase the interest rate, as he
believes the raise in wages will improve the inflation. On the other hand,
David Dodge, who led the Canadian central bank between 2001 and 2008, does
not agree with Poloz. He feels that Poloz needs to monitor closely the financial
stability issue and raise the interest rates now since the economy is not reaching
the potential target. Dodge believes that if the government increase the interest
rates by 1 percent, it will still be below the neutral the 3 per cent estimated
by the Bank of Canada. He said that this increase is neither simulative nor
contractionary. Dodge has some concerns that the interest rate should be
higher, if Canada wants to aim for a balanced economy. (Argitis, 2017)

Currency Exchange Rate

“The exchange rate is the price
of one national currency, such as the Canadian dollar, expressed in terms of
another currency, for example, the U.S. dollar, or a basket of currencies”. (Bank
of Canada, 2012)

Canada has a flexible exchange
rate 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 determines
the Canadian dollars in the foreign exchange market. Domestic and external
factors affects the movements in the Canadian dollar. The world prices for
commodities and Canada’s status as a net exporter of raw materials compared
with other countries, mainly the United States, as major importer, are examples
of these factor. Therefore, rising commodity prices will result in the
escalation of the Canadian dollar against the U.S. dollar. (Bank
of Canada, 2012)

Demand for Canadian products
domestically and internationally have an effect on the Canadian currency. A
strong demand will support the value of the dollar and vice versa.  Also, if Canada’s inflation rate were
persistently higher than that of the United States, will result in the depreciation
of the dollar value in order to maintain the competitiveness of the exports in
U.S. markets. (Bank of Canada, 2012)

Figure 2 displays the current Canadian
exchange rate against US Dollar and European Euro.

Monetary Policy

In Canada, the central bank
implements a set of policies that the amount of money circulated in the
economy. The monetary policy is implemented by adjusting interest rates to
reach a rate of monetary expansion to stabilize inflation. (bankofcanada.ca)

The monetary policy in Canada has
three main characteristics.  First is
that it is led by the Bank of Canada, a government-owned Crown corporation that
operates with considerable independence from the federal government. Second,
interest rates on similar assets are the same across all Canadian regions due
to the fact that financial capital can move easily within Canada. This results
in having only one monetary policy for all of Canada in which The Bank of
Canada is the only issuer of legal tender (bank notes) in Canada. The last
characteristic is that despite of the fact that different economic variables
influence monetary policy decisions, the Bank of Canada has only one policy
instrument. (bankofcanada.ca)

The Bank’s policy instrument is
the target that the bank sets for the overnight interest
rate.  In Canada, commercial banks borrow funds from each other for very
short periods at the overnight interest rate which fluctuates daily. By broadcasting
a specific interest rate (25 basis points above the target overnight rate) at
which it is prepared to lend unlimited amounts to commercial banks and a second
specific interest rate (25 basis points below the target overnight rate) at
which it is prepared to borrow unlimited amounts from commercial banks, the
Bank of Canada maintains the overnight interest rate within an broadcasted
operating band. Additionally, by changing its target for the
overnight interest rate, the Bank of Canada can modify the actual overnight
rate 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 the
yield on 30-day treasury bills to that on 30-year government bonds, and from
the rate on 3-month guaranteed investment certificates (GICs) to that on
10-year home mortgages. When the Bank lowers the target for the overnight rate,
these interest rates fall, firms and households increase their demand for
credit, and commercial banks increase their quantity of credit supplied. On the
contrary, when the Bank increase the target, interest rates increase, firms and
households decrease their demand for credit, and commercial banks reduce their
amount of credit supplied. (bankofcanada.ca)

While the amount of credit
increase, the volume of transactions for goods and services increase, resulting
in an increase in the overall demand for money needed to make these
transactions. Individual firms and households fulfil their demand for money by
withdrawing funds from their accounts at commercial banks, often in the form of
bank notes. Also, when commercial banks run short of bank notes, they sell
assets—in particular, government securities, to buy bank notes from the Bank of
Canada. By purchasing government securities, the Bank of Canada increases the
volume of bank notes in the economy to satisfy the greater demand from
commercial banks. This will result in increase in assets (government
securities) and liabilities (bank notes). (bankofcanada.ca)

Unemployment

Canada’s witnessed a decrease in the unemployment
Rate 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 marginally
above NAIRU. (Figure 4)

Fiscal and Minatory Policies

Fiscal policy is the use of the government
tax and spending policies to achieve government objectives, and monetary policy
stimulates the aggregate demand through monetary transmission mechanism.
Expansionary monetary policy involves reducing tax rates which lead to
expansion of aggregate demand (Ragan, 2014, pg. 727).

Different approaches have been followed
by the government of Canada the government in order to support its economic
growth. For example, investing in infrastructure, tax cut for the middle class and
adjustments to the Canada Child Benefit. Reducing the tax rate and increasing
the spending by the government has reflected an expansionary monetary which is
leading according to the government to economic growth.

Business
Cycle

The business cycle is used identify the improvement
and the decline of the economy over time. Figure 5, illustrates the business
cycle in Canada from 1871 to 2017 in terms of the change in GDP. The
growth of the economy is represented by a wave-type pattern of expansions
and contractions. During the financial crisis of 2008/2009, Canada witnessed a
contraction, and since 2009 there has been some improvements that resulted in an
expansion in the business cycle. The proper management of the business cycle eliminates
the fluctuation between expansion and contraction. This is usually accomplished
by the proper implementation of the fiscal and monetary policies by the
government.

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 soundness
of the Canadian dollar, but to the overall health of the economy” (Bank of
Canada). Comparing it to the rest of the world, Canada’s inflation rate is
considered to be progressing at a good rate. The rise and fall in prices aids
to balance the inflation rate. When the price of oil and gas dropped, food and
housing prices increased and this balanced the inflation rate. (Statista)     

Future
Outlook

The Organization for Economic Co-operation
and Development suggested that Canada is going to witness an economic growth in
2018.  The Paris-based economic think
tank stated that there is 3.2 growth rate expected for the Canadian economy. On
the other hand, The OECD thinks that the growth rate will stay at its 2.3 per
cent. (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 start
decreasing 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 the
years to come and range between 6.22% and 6.35%. (Figure 7). There is a debate occurring
 on whether Canada is going to face
another recession in the years ahead. Some observers highlight that the slope
of the yield curve of government bonds remains distinctly positive which
implies that there is a very little chance of recession. Others point to the
short age of the current expansion in arguing that there is a much higher
possibility of recession. As the current Canadian unemployment rate of 6.5% is
marginally above NAIRU6 , the historical probability of recession is only 3%
within a year and 13% within three years. (Arseneau & Paquet, 2017) 

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