What are the main challenges?
The Canadian economy has delivered solid performance for nearly a decade with increased resilience to economic shocks, demonstrating the benefits of a well designed macroeconomic framework and the pay off from a range of structural reforms implemented since the late 1980s. A relatively weak outturn in 2003 was mainly attributable to the impact of the sharp appreciation of the Canadian dollar, lacklustre foreign demand and a series of other unfavourable, but transitory, shocks affecting specific industries. These effects have now dissipated, and activity is once again buoyant. Given recent developments, the economy is expected to expand by around 3 per cent in 2004 and 3½ per cent in 2005, somewhat above the rates projected in the last Economic Outlook. At this pace, the OECD’s measure of the output gap would close during the course of 2005, and the Bank of Canada will need to continue removing monetary stimulus so as to avoid inflation picking up. The March 2004 budget reflected the federal government’s continuing commitment to achieving balanced budgets or better and reducing public debt, a strategy that has widespread public support. The current macroeconomic policy mix is appropriate for this point in the economic cycle. But it will be important to maintain a neutral fiscal stance: any easing of fiscal policy would provide an unhelpful pro cyclical stimulus that would need to be offset by higher interest rates, pushing up the Canadian dollar still further and squeezing the interest and exchange-rate-sensitive sectors of the economy.
Macroeconomic performance in an international perspective
Per cent
1. Including intra-trade.
Source: Statistics Canada; OECD.
Last year’s appreciation of the dollar reflects a shift in portfolio preferences after a long period when Canada was unjustifiably seen as a perennial under performer, and the currency is now at a level that is probably not far from fundamental values. This shift in relative prices for domestic versus foreign produced output will bring about structural changes as firms adjust. In any case, Canadian enterprises will face even stronger competition from rivals in emerging economies in coming years and higher security costs at the US border. Despite some calls from business for a lower dollar or for government inducements to keep production in Canada, the most appropriate response is for domestic policy makers to redouble their focus on enhancing productivity growth and innovation in high and low technology sectors alike.
Canadians have benefited from an expansion in GDP per capita at a rate of around 2½ per cent per year since the mid 1990s, significantly faster than was experienced in the first half of the 1990s. This partly reflects a turn-around in labour utilisation, with strong employment growth offsetting some shrinkage in average hours worked per employee. A larger contribution has come from an increase in hourly productivity growth, which has averaged close to 2 per cent per year since 1995. Although productivity growth is subject to cyclical fluctuations, especially in the business sector, the stronger underlying productivity performance since the mid-1990s in part reflects the better functioning of the economy following a series of structural reforms. These have allowed the economy to adjust more rapidly to the forces of change.
This positive backdrop provides the new federal government and its provincial counterparts with an ideal opportunity to identify previously overlooked pockets where changes in approach would deliver better outcomes and tackle those areas that for various reasons have so far proved too difficult to address. Looking ahead, as Canada’s baby boomers pass into retirement, the dependency ratio will rise and the working age population shrink in the absence of net inflows of migrants. Responding to these developments presents the country with two key challenges:
-
Maintaining steady improvements in living standards, despite increases in the old age dependency ratio. This will mainly require continued strong rates of productivity growth, although adjustments to policies affecting labour supply could contribute by attenuating the expected fall in total hours worked.
-
Ensuring that public finances across all levels of government remain sustainable in the long term, especially given the upward pressures on publicly financed health care outlays.
GDP per person
2002, PPP adjusted, OECD average = 100
Source: OECD, Productivity database.
Return to the OECD Economic Survey - Canada 2004 homepage
A printer-friendly Policy Brief (in PDF format) may also be downloaded. The Policy Brief contains the executive summary and the OECD assessment and recommendations, but does not necessarily include all of the charts available from the above pages.
-------------------------------------------------------
The complete edition of the OECD Economic Survey for Canada is available from:
-
SourceOECD for subscribing institutions and many libraries
-
-
Olisnet, under "Publication Locator", for government officials with accounts (
subscribe)
-
Follow us
E-mail Alerts Blogs