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Archived - Chapter 2 
Economic Developments and Prospects

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This chapter reviews recent economic developments and prospects. Using the average of private sector economic forecasts, it establishes the economic-planning assumptions that underlie the Government’s budget plan and presents an assessment of risks and uncertainties associated with the economic outlook.

The Canadian economy recorded solid growth in the first three quarters of 2004, supported by healthy increases in final domestic demand. Strong global growth in 2004 and rising demand for Canadian commodities contributed to a mid-year burst of increased export activity. However, the rising Canadian dollar took its toll on exports in the latter part of the year.

Looking ahead, forecasters expect somewhat weaker near-term economic growth than estimated at the time of the November 2004 Economic and Fiscal Update. This reflects the recent appreciation of the Canadian dollar. The risks to the forecast are mainly external, stemming from uncertainty about further exchange rate adjustments and their impact on domestic demand.

Before turning to recent developments in the Canadian economy and the outlook, this chapter will review Canada’s fiscal and monetary framework, which has contributed to sustained improvements in Canadian living standards over the past eight years and enhanced the overall resiliency of the economy.

A Review of Canada’s Macroeconomic Framework

A decade of achievement—Canada’s fiscal turnaround is unmatched among G-7 countries

Total Government Financial Balances/Total Government Net Financial Liabilities

Improved national saving has put net foreign debt on a firm downward track

Surces of Saving/Net Foreign Debt

Years of low and stable inflation, along with a track record of fiscal discipline, have led to low interest rates

Total and Core Inflation/Bond and Mortgage Rates

Sound fiscal and monetary policies have contributed to increased employment and sustained improvements in Canadian living standards

Employment Growth in G-7 countries, 1997-2004/Real GDP Per Capita Growth in G-7 Countries, 1997-2004

Recent Canadian Economic Developments

Final domestic demand supported Canadian economic growth in the first three quarters of 2004

Growth in Canadian Real GDP and Final Domestic Demand

Employment growth has remained strong …

Employment and the Unemployment Rate/Employment Growth by Region

… which has contributed to disposable income growth

Growth in Real Personal Disposable Income Per Capita

Employment gains and disposable income growth have supported consumer confidence and growth in consumer spending

Index of Consumer Attitudes/Growth in Real Consumer Spending on Goods and Services

Housing market activity remains strong, aided by continued low interest rates

Housing Affordability and One-Year Mortgage Rate/Housing Starts

Low borrowing costs, healthy profits and strong business confidence …

Debt as a Share of Net Worth and Corporate Profits as a Share of GDP/Index of Business Confidence

… continue to support business investment, particularly in machinery and equipment—a key driver of productivity growth

Real Business Non-Residential Investment Growth

However, exports and imports have been affected by the strength of the Canadian dollar, especially in the latter half of 2004

Growth in Canadian Real Exports and U.S. Final Domestic Demand/Growth in Canadian Real Imports and Final Domestic Demands

The Canadian Dollar

The Canadian dollar appreciated further against the U.S. dollar in 2004

The Canadian Dollar

While many major currencies have appreciated against the U.S. dollar, the Canadian economy is more exposed to U.S. currency fluctuations

Exports as a Share of GDP in 2003

Strong global demand for commodities has contributed to the appreciation of the Canadian dollar …

Commodity Prices

… but global current account imbalances have led to a depreciation of the U.S. dollar against many currencies

U.S. Current Account and Real Trade-Weighted Exchange Rate

Employment in the manufacturing sector has been negatively affected by the appreciation of the Canadian dollar

Employment by Industry

The Bank of Canada held its key policy rate steady in December and January 

Bank of Canada Policy Rate

Private Sector Economic Forecasts

The Department of Finance surveys about 20 private sector economic forecasters on a quarterly basis regarding their outlook for the Canadian economy. The Department also regularly reviews forecasts for the U.S. and major overseas economies from private sector forecasters and international organizations such as the OECD and the International Monetary Fund.

Department officials also meet with a group of private sector economists to discuss Canada’s economic outlook and the risks and uncertainties associated with that outlook. The Department’s survey of private sector forecasters is the basis for the economic assumptions that underlie the fiscal projections for the budget.

The economic forecasts reported here reflect the survey of private sector forecasters conducted by the Department in December following the release of the third-quarter National Accounts by Statistics Canada on November 30, along with the most recent forecasts by private sector economists in the U.S. and by the OECD.

World Economic Conditions

U.S. growth is expected to be strong in 2005, although growth will be somewhat slower than in 2004

U.S. Real GDP Growth

The global expansion remains on track

Real GDP Growth Outlook

The Canadian Economic Outlook

Private sector forecasters expect Canadian growth to pick up gradually in 2005 and 2006

Outlook for Canadian Economic Growth

Interest rates are expected to remain steady until mid-2005

3-Month Treasury Bill Rate/10-Year Government Bond Rate

Risks and Uncertainties

A key risk to the outlook is posed by the large and persistent U.S. current account deficit …

U.S. Current Account Balance - Regional Components

… which could be resolved by a combination of stronger overseas growth, adjustment of Asian currencies, and further U.S. dollar depreciation against floating currencies like the Canadian dollar

U.S. Capital Account Balance-Regional Components

Large U.S. fiscal deficits also present a risk to Canadian growth

U.S. Federal Budgetary Balance

Private Sector Forecasts for 2004–2006

  2004 2005 2006 Average

(per cent)
Real GDP growth        
March 2004 budget 2.7 3.3 3.2 3.1
November 2004 Economic and Fiscal Update 3.0 3.2 3.1 2.9
February 2005 budget 2.7 2.9 3.1 2.9
GDP inflation        
March 2004 budget 1.4 1.7 1.9 1.8
November 2004 Economic and Fiscal Update 3.1 2.1 1.8 1.7
February 2005 budget 3.3 2.0 1.9 1.9
Nominal GDP growth        
March 2004 budget 4.1 5.1 5.2 5.0
November 2004 Economic and Fiscal Update 6.2 5.3 5.0 4.7
February 2005 budget 6.1 4.9 5.0 4.8
3-month Treasury bill rate        
March 2004 budget 2.2 3.1 4.0 4.5
November 2004 Economic and Fiscal Update 2.1 3.2 4.4 4.7
February 2005 budget 2.2 2.7 3.5 4.6
10-year government bond rate        
March 2004 budget 4.8 5.4 5.7 5.7
November 2004 Economic and Fiscal Update 4.7 5.0 5.7 6.0
February 2005 budget 4.6 4.6 5.1 5.6
Unemployment rate        
March 2004 budget 7.5 7.2 7.0 6.8
November 2004 Economic and Fiscal Update 7.3 7.0 7.0 6.8
February 2005 budget 7.2 7.2 7.0 6.7
Employment growth        
March 2004 budget 1.6 1.5 1.5 1.3
November 2004 Economic and Fiscal Update 1.7 1.6 1.5 1.2
February 2005 budget 1.7 1.4 1.5 1.4
U.S. real GDP growth        
March 2004 budget 4.7 3.8 n/a n/a
November 2004 Economic and Fiscal Update 4.4 3.5 n/a n/a
February 2005 budget 4.4 3.6 3.4 n/a

Sources: March 2004, September 2004 and December 2004 Department of Finance surveys of private sector forecasters; November 2004 consultations with private sector forecasters; March 2004, October 2004 and January 2005 Blue Chip Economic Indicators.

Note: This chapter incorporates data available up to February 7, 2005. Figures in this chapter are at annual rates unless otherwise noted.

1 OECD, Economic and Development Review Committee, Economic Survey of Canada (October 2004). [Return]

2 The official definition of the employment rate in Canada is the number of employed persons as a share of the population 15 years of age and older. [Return]

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