Healthy growth prospects

Diversification in goods and services sustains Canada's strong economic position.

"Canada is strong today, and we have a plan for an even better tomorrow!"
— James M. Flaherty, MP, Minister of Finance, Government of Canada, in his 2007 budget speech

Flaherty's budget speech didn't just echo the upbeat mood of the Canadian economy, it also celebrated its achievements — lower unemployment rates and taxes and a strong fiscal performance being the most important among them. These trends, though, are not surprising considering the competitive growth of the Canadian economy. The abundance of natural resources, dynamic construction and manufacturing industries, growth in the financial and service sectors and favourable trade relationships with other nations, form the bedrock of the country's success.

A good year

As it did in 2005, Canada's performance in the last year has contributed to sustaining its position as an economic powerhouse. It also heralds more positive trends this year and in 2008. Graham Rush, Head of Consulate and Senior Trade Commissioner — Consulate of Canada in Dubai, says that 2006 was a good year for Canada. "The GDP grew by 2.7 per cent — which was among the highest in the G7 countries — and was driven mainly by consumer spending and foreign direct investment (FDI). Provinces with heavy natural resource-based economies, including Alberta, British Columbia, Manitoba and Newfoundland, performed the best. The unemployment rate at 6.3 per cent was also the lowest in 30 years," he says.

Canada's provinces, in particular, have played an important role in driving the overall economic growth. Rush says that Ontario is the largest and most advanced provincial economy, having a majority share of Canada's manufacturing and service sectors. The western provinces have contributed a disproportionate share to the country's natural resource production, with Alberta, in particular, playing a key role in the energy sector. Their economies have shown strong growth recently because of the favourable commodity prices for oil and various metals and minerals. Newfoundland and Saskatchewan will join Alberta and British Columbia as the fastest growing provinces in 2007.

Increased investments

The healthy flow of both inward and outward investment has also helped sustain Canada's open economy and the high standard of living enjoyed by its citizens. "The volume of each has grown dramatically in the past 25 years. Canadian direct investment abroad and FDI in the country posted the highest percentage increases last year since the technology boom in 2000. Investment in Canada from abroad grew by 10.1 per cent in 2006, reaching C$448.9 billion (about Dh1,570 billion). Canada's investment abroad also grew impressively, reaching C$523.3 billion (about Dh1,830 billion), or 13.8 per cent more than the year before, although much of this was due to the appreciation of the Canadian dollar," says Rush.

In 2006, the US maintained its role as the leading foreign investor in Canada, accounting for 61 per cent of total FDI. According to Rush, US investment is relatively broadly distributed, with energy and metals, finance, insurance, machinery and transportation equipment being significant. The next four largest foreign investors in Canada were the UK (8.7 per cent), France (6.6 per cent), the Netherlands (five per cent) and Switzerland (3.1 per cent).

A notable development was the tripling of FDI from Brazil to C$9.4 billion, which accounted for 2.1 per cent of FDI in 2006. Overall, 55 per cent of FDI in Canada was in the goods industries. The energy and metals industries continued to receive significant investment. A substantial portion of FDI in Canada is also in finance and insurance.

Growth across sectors

Growth in different sectors has also been favourable. Rush says that while some observers still incorrectly view Canada mainly as a producer of commodities and semi-processed goods, there is a strong diversification across many sectors for both goods and services. "In 2006, amid overall growth of 2.7 per cent, there were varying results in different areas of the economy. As was the case the previous year, service industries grew (3.6 per cent) more quickly than the goods-producing industries (0.8 per cent). Growth was particularly strong in wholesale and retail trade, construction, financial and insurance services, while manufacturing and forestry experienced a challenging year. However, the almost seven per cent appreciation in the Canadian dollar versus the American dollar, combined with higher costs, was a drag on growth in export-sensitive manufacturing and sectors vulnerable to import competition.

Solid growth in the global economy and in Canada in 2006 has created a favourable environment, resulting in another record year for Canadian trade, says Rush. Natural resources played a key role in this growth.

"Our total exports of goods and services in 2006 grew by 1.1 per cent to C$523.7 billion (about Dh1,832 billion), or 36.4 per cent of Canada's gross domestic product, making us one of the most trade dependent economies in the world. Imports of goods and services grew by 4.2 per cent to reach C$486.5 billion (about Dh1,702 billion), leaving a positive trade balance of C$37.2 billion (about Dh130 billion) in 2006," he says.

Rush says that the US is Canada's most important trading partner. In fact, it is the largest bilateral trade relationship in the world.

Goods exports to the US were worth C$361.7 billion (about Dh1,265 billion). The country's other main trading partners are the UK, Japan, China, Mexico, Germany, Korea, Netherlands, France and Belgium. "The composition of Canada's export goods package has changed over the past several years, with industrial goods and materials offsetting declines in consumer goods, machinery and equipment, automotive, forestry and energy products," he says.

Strong trade links

Canada's strong trade links with countries such as the US are a result of landmark trade agreements, including the North American Free Trade Agreement (NAFTA). "The NAFTA, which comprises Canada, the US and Mexico, has played an important role in Canada's economic growth over the past decade, stimulating expansion of our trade and investment links with our southern neighbours. NAFTA built upon the Canada–USA Free Trade Agreement signed five years earlier," says Rush.

Canada is also a strong supporter of the World Trade Organisation and is pursuing free trade agreements with other partners. The most recently concluded is with the European Free Trade Association countries of Iceland, Norway, Switzerland and Liechtenstein. Free trade negotiations are also being launched with Colombia, Peru and the Dominican Republic.

Canada also has thriving trade relations with the UAE. According to Statistics Canada, exports to the UAE in 2006 were valued at C$787 million (about Dh2,715 million). This is a 33 per cent increase over the 2005 figures and four times the 2001 numbers.

"In 2006, the UAE was Canada's most important export market for merchandise goods in the whole Middle East and North Africa region.

Together with service exports and UAE exports to Canada, our two countries enjoy a billion dollar trading relationship. Investment flows in both directions are also growing, including recent significant UAE investments in Canada's transportation and energy sectors. There are more than 100 Canadian companies in the UAE, representing a wide range of sectors, industries and professions. There are also two active and well supported business organisations, the Canadian Business Council of Dubai and the Northern Emirates and the Canadian Business Council of Abu Dhabi," says Rush.

In addition to trade with other countries, domestic demand is also contributing to economic growth. According to a January report by the Toronto-based TD Bank Financial Group, with the shadow of a slowing US economy looming over Canada's export-orientated manufacturing sector, the Canadian consumer is playing an increasingly important role in supporting the overall economy.

According to Rush, Canada's domestic market comprising more than 33 million people is spread from east to west over a vast landscape (4.5 time zones) and is highly urbanised and concentrated along the border with the US. Canada is a nation of immigrants from many countries, so consumer taste and preferences are equally diverse as part of a modern, advanced economy offering a high standard of living.

According to TD Bank Financial Group's report, "Growth in inflation-adjusted personal expenditures has accounted for at least half the increase in real gross domestic product (GDP) in all but one of the last nine quarters. During the last two quarters when economic growth fell below its long-term trend rate, growth in consumer spending jumped to more than 100 per cent of the increase in real GDP." The report also indicates that consumers will continue to play a critical role in supporting the Canadian economy over the next two years.

Present and future prospects

According to the Bank of Canada's April Monetary Policy Report (2007), the growth of the Canadian economy has been essentially in line with the bank's expectations as set out in the January Monetary Policy Report Update, but inflation has been higher than expected.

The report states that the "Canadian economy is projected to grow by 2.2 per cent in 2007 and 2.7 per cent in both 2008 and 2009, returning to its production capacity in the second half of 2007 and remaining there through 2008 and 2009."

The update also mentions "that core inflation should remain slightly above two per cent over the coming months, considering pressures on capacity and the impact of higher core food prices. However, upward pressure on core inflation is expected to moderate, bringing core inflation back to two per cent by the end of 2007."

Rush also sees better times ahead for Canadian manufacturers. "Given the importance of the US as a trade and investment partner, there is always a close lookout for the slowing down of the US economy and its impact on our exports and FDIs from the US.

"The American economic slowdown in the latter part of 2006, along with a stronger Canadian dollar, had an impact on our manufacturing sector.
However, the outlook for the US economy in 2007 is for a soft landing, so Canadian suppliers, especially manufacturers, will look for an eventual upturn in their prospects," says Rush.