Canada’s economy is inextricably tied to that of its southern neighbour; the Bank of Canada keeps an eye on the American dollar, while the two countries argue over oil supplies and lumber exports. Even during America’s 1990s boom Canada had its difficulties, notably the airline industry and the Atlantic provinces. In 2001, American’s slowdown contributed to lower growth in Canada. But by early 2002, the economy had picked up again, as had the Canadian dollar. Canada’s economy depends more on manufacturing than natural resources, though there has been talk of extracting oil under Alberta (which would be expensive) and exporting water (an idea floated by the premier of Newfoundland).
Canadian outlook for 2002-03 mirrors the regional trends. Real GDP growth this year is anticipated at just under twice last year’s rate, with moderately higher growth in 2003. Continued strength in domestic demand, buttressed by a strong employment picture, the legacy of stimulatory fiscal and monetary policies, and movement from inventory reduction to accumulation, will underpin the near term growth. Externally, increasing demand will have a beneficial impact on Canadian exports. However, our exports have substantial import content, which moderates the influence on the GDP growth. The Canadian forecast is predicted on continued improvement in external conditions, and features modest exchange rate adjustments. Key downside risks to the forecast include weaker external growth (especially in the United States) and significant exchange rate adjustments. High energy prices also imply downside risk, but the impact is partly offset by Canada’s position as a accompany sustained price increases.
According to the Bank of Canada the threat of war in Iraq, higher oil prices and turbulence in the global economy are combining to push Canada’s growth rate lower and inflation higher. Canada has been leading the Group of Seven industrialized countries in growth this year but can no longer be immune from events outside its borders.
After a very strong performance in the first three quarters of this year, economic growth in Canada is expected to slow somewhat in the fourth quarter and first half of 2003. Over the next three quarters performance was expected to average slightly less than the economy’s 3 per cent growth potential, but was expected to pick up to more than 3 per cent in the second half of next year.
The bank predicted the economy would grow by 3.5 per cent this year and by 2.75-3.75 percent in 2003.
The US economy is struggling to break out of the doldrums, with widespread sluggishness infecting retail sales, according to a regular survey of business conditions by the Federal Reserve. The housing market was the only bright spot in an otherwise weak economy. But Alan Greenspan, the Fed chairman, sounded an optimistic note arguing that the US productivity gains in the late 1990s were likely to continue, boosting business investment.
The weakness in retail sales already evident in official figures for September had persisted into October. Retail sales were weak across the nation, including some declines in motor vehicle sales from very high levels. Commercial real estate markets softened, while demand for labour was lacklustre. The residential housing market remained strong. The US Mortgage Bankers Association said that demand for mortgages, although at very high levels, had fallen and warned of a further drop next year.
Financial markets are still betting that the Fed will keep rates unchanged at 1.75 per cent at its meeting on November 6. Following the release of the beige book, economists at the Chicago Board of Trade said that the futures market was pricing in a 74 per cent chance the Fed would leave rates on hold. Recent rallies in stock prices have helped to diminish the chance of an imminent cut in rates.
Greenspan’s speech addressed concerns that the rapid rise in productivity growth over the past year could be transitory, as companies trimmed fat in the face of softening demand. Although acknowledging that risk, he said the underlying improvement in productivity growth - which Fed economists estimate has increased to 2 to 2.75 per cent a year - looks likely to continue in the medium term.
It is both remarkable and encouraging that, despite all that has transpired over the past couple of years, a significant step-up in the growth of productivity appears to have persisted.
Germany’s economy is the world’s third-biggest and one of its most advanced. As the economic heart of Europe, its performance has far-reaching effects outside Germany, particularly in other EU countries and in Central and Eastern Europe. The performance has been sluggish, with growth of just 0.6 per cent in 2001 and unemployment hovering around 10 per cent. Things are worse in the ex-communists east, but that region may soon grow faster than the west. Chancellor Gerhard Schroder pushed through a bold tax reform in his first term, and he has backed some labour market reforms that would help get Germans into jobs. But the labour costs remain high, and red tape thick - the proposed measures are not the thorough overhaul the labour market needs.
Germany’s six leading economic institutes predict a gloomy outlook for next year and warned that recent tax rises by new government could prove counterproductive by harming recovery.
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