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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Canada published on 11 June 2008.
The economy has been remarkably strong in recent years
The Canadian economy has performed remarkably well for the past decade and a half. Real GDP growth has been robust, employment gains have been impressive, the unemployment rate has fallen to its lowest level in a generation, and positive terms of trade effects have combined with real per capita output growth to boost Canadian living standards. Furthermore, higher commodity prices have led to a rapid appreciation in the dollar back to around parity with its US counterpart, helping to discipline wage and price setting and meet the official inflation target. Domestic price inflation has also been held in check by expanding production capacity, thanks to rising female and older worker labour force participation, which has more than compensated for relatively weak productivity growth. However, high commodity prices and the resulting currency appreciation have been forcing rapid economic adjustments through industrial and regional employment shifts. Most signs point to orderly adjustment – even resource poor regions have seen overall employment gains, despite substantial losses in manufacturing.
But it weakened toward the end of 2007
Most recently, the currency appreciation, together with the worldwide turmoil in credit markets and associated weakening in foreign demand, has caused a sharp drop in Canada’s net exports, slowing growth to a crawl. Looking ahead, the US downturn is expected to continue to exert downward pressure on Canada’s GDP growth through the trade and credit channels, but the economy should rebound somewhat in 2009. Risks are skewed to the downside and mostly derive from large uncertainties regarding the future path of the US economy and its currency and the extent of the financial market correction that will ultimately occur there. In any case, it is likely that economic slack will open up, alleviating residual price pressures and holding inflation well below rates seen abroad. This will allow the Bank of Canada room to lower interest rates further, helping to return output to its potential level as quickly as possible.
The key challenge is to continue adjusting smoothly to global shocks, while raising productivity growth and curtailing GHG emissions
Policy makers are struggling with an unprecedented series of global shocks and risks. Oil, food and other commodity prices have increased almost uninterruptedly for the past five years – mainly reflecting rising global demand rather than temporary supply disruptions as in the past. As a commodity exporter Canada can easily learn to live with a quasi permanent high oil price – but it must also adjust to the corresponding downside of a strong Canadian dollar and a weaker US economy. Meanwhile, demographic ageing is underway, implying that employment – up to now a mainstay of growth – will be shifting into a lower gear while pressures on age related public spending will build. At the same time climate change risks have intensified; Canada’soil sands sector, a fast growing emitter of GHGs, faces the uncertain costs of planned abatement policies, as do other investors. Three key structural challenges, roughly corresponding to the short , medium and long term policy horizons, emerge:
The structural shift provoked in part by the terms of trade shock may be one of unparalleled magnitude in Canada’s modern history. It must continue to be managed in a sustainable way, notably to prevent excessive crowding out of exposed sectors like manufacturing and forestry by other natural resource production and the public sector as they benefit from oil and other commodity price windfalls.
While greater labour force participation, especially of marginal groups, longer working lives and immigration can still be of use in boosting labour supply, the looming rise in the old age dependency ratio means that the onus will increasingly be on higher productivity growth to maintain rising living standards and sustainable public finances.
Climate change and Canada’s commitment to joint global action in fighting it requires a switch to a model of sustainable development, i.e. much less energy intensive consumption and production patterns, notably in the energy sector itself.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Canada 2008 is available from:
For further information please contact the Canada Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Alexandra Bibbee, Yvan Guillemette, Shuji Kobayakawa and Annabelle Mourougane under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.