InFocus | Canada
Seeing the light
Canada manages its finances well and has avoided the worst of the economic downturn - just ask Obama
- By Rachel Latham, Gulf News Report
- Published: 00:00 September 14, 2010
- Image Credit: Supplied
- Tourists on the causeway at Victoria's inner harbour in Vancouver Island, British Columbia. Canada's economy has managed to steer itself to safety on the strength of a C$40 billion stimulus package in 2009
How could it be that a country so dependent economically on the US as a market for its goods, avoided being sucked into the same economic morass? US President Barack Obama went some way to answering that question on a visit earlier this year, saying, "Canada has shown itself to be a pretty good manager of the financial system in ways that we haven't always been in the United States."
Sub-prime mortgage lending, which caused so much damage elsewhere, was negligible in the Canadian market. Through a combination of prudent practice and tighter regulation, Canada's banks didn't suffer as others did.
Soundest in the world
All six of Canada's biggest banks have maintained their dividends. The World Economic Forum has stated that they are ‘the soundest in the world'. Two — Royal Bank of Canada and Toronto-Dominion — are among only half a dozen banks worldwide that still enjoy a Moody's triple-A credit rating. The banks owe this strength mainly to their vast and stable domestic retail business, which ensures geographic diversification and efficiencies of scale generally not found in the US.
Another difference has been the resilience of the country's housing market. Fuelled by low interest rates, Canada's residential property sector staged a strong recovery from the financial downturn to return to record levels of activity in late 2009.
That helped pull the overall economy out of recession (albeit a mild one). House prices in Toronto and Vancouver in fact have hit new records in recent months. In response, mortgage lending rules were tightened in February this year.
Key economy drivers
Finance and insurance, and real estate, form key elements of Canada's service industry, which drives the Canadian economy, accounting for nearly 68 per cent of GDP and employing 75 per cent of the 17.9 million workforce.
Another essential component is natural resources and their abundance: of oil, natural gas, copper, gold, iron ore, lead and timber. Canada's natural resources are spread across its various regions. While the oil industry is important in Alberta, Newfoundland and Labrador, Northern Ontario houses a large number of mines of coal, copper, iron ore and gold. The British Columbia region is famous for forestry, while the fishing industry is quite strong in the Atlantic Provinces.
In addition, Canada has the world's largest economy on its doorstep, a ready market for its output. Most significantly, Canada is the largest supplier of energy to the US, and nearly two-thirds of its forest products are exported there.
Moreover, while the proportion of GDP devoted to agriculture has declined significantly, Canada remains one of the world's largest farming producers and exporters. It also has a sizable manufacturing sector, the car industry being especially important as home to branch plants of all the major American and Japanese automakers. Manufacturers have been attracted to Canada by the highly educated population, with lower labour costs than the US, which partly reflects Canada's publicly funded health care system, exempting companies from the high health insurance costs they are liable for in the US.
Taking a hit
The diversity of the Canadian economy and the conservatism of its banking sector did not, however, totally protect Canada from the chaos of the global financial crisis. That's hardly surprising, given that exports account for 30 per cent of the country's GDP (the US by far the dominant market).
The global economic downturn resulted in a decline of 25.5 per cent in Canadian �exports between 2008 and 2009. Still, a trend of diversification in Canada's export destinations is continuing. Although the US still took 75 per cent of Canadian exports in 2009, that ratio was down from 87 per cent in 2000.
The deep problems in the US car industry that impacted Canada's car plants and parts-makers contributed to this decline. On top of that, the US housing downturn hit the Canadian timber industry, resulting in a fall in forestry exports by 25 per cent over the past two years.
So, even if Canada did not suffer to the same degree as many of the other leading economies of the world, it was still undoubtedly affected. According to Statistics Canada, the unemployment rate rose to 8.6 per cent in June, the highest since 1998, with the manufacturing centres in central Canada being disproportionately hit.
That said, the Canadian government has been one of the first to start scaling down its (two-year) stimulus package of spending and tax breaks. Interest rates, which had been cut gradually from more than 4 per cent to a low of 0.25 per cent, are now on the rise again, though the benchmark overnight interest rate remains at a modest 0.75 per cent.
Confident of economic recovery, the government nonetheless remains cautious about recovery prospects. With GDP growth averaging 2.6 per cent during 2001-08, Canada's recession was brief, covering three quarters, with GDP falling by an aggregate 3.3 per cent. Growth at an annualised rate of 4.9 per cent was recorded in the fourth quarter of 2009, moving ahead a dazzling 6.1 per cent in the first three months of this year — the fastest in a decade.
Growth rate
However, reflecting mainly the slow pace of the global economy, and the more modest impetus in domestic consumer spending, the Bank of Canada (central bank) has shaved its growth forecast for the economy this year to 3.5 per cent from 3.7 per cent. Next year's growth rate is now projected at 2.9 per cent. These are obviously still reasonable outcomes.
Following the C$40 billion (about Dh139 billion) stimulus package in its 2009 budget, the government ran a record deficit of C$47 billion in the latest fiscal year to March, according to preliminary data. Finance minister Jim Flaherty projects a similar shortfall in the current year.
But at 3.4 per cent of gross domestic product, Canada's deficit is more manageable than that of many. And debt-to-GDP, at 35 per cent, is the lowest among the leading industrial economies.
With due care and attention, Canada, somewhat used to insulating itself to a harsh climate in another sense, seems to have dealt well with the ill winds blowing from the south and beyond.
The numbers
68 per cent
Contribution in percentage terms by Canada’s service industry to the country’s GDP
C$47 billion
The record deficit declared by the government in the last fiscal year to March
6.1 per cent
The rate of growth of GDP in the first three months of this year - the fastest recorded in a decade.
