labour market improvements appear to have stalled, with the unemployment rate hovering close to 8% since then. Some household spending was likely brought forward into the first half of the year ahead of the July introduction of harmonised sales taxes in Ontario and British Columbia. Implementation of these taxes added to headline inflation in July, but year-on-year core inflation (which excludes such effects) has been edging lower, reaching 1.5% in September.
The economy continues to face headwinds…
Earlier labour market improvement and fiscal stimulus have bolstered household spending to date but are expected to subside going forward. Wage growth has moderated and household balance sheets are stretched, with debt levels having expanded to about 145% of personal 1 2 http://dx.doi.org/10.1787/888932347256
Canada: Employment, income and inflation
Percentage changes
2008 2009 2010 2011 2012
Employment 1.5 -1.6 1.7 1.6 1.5
Unemployment rate1 6.2 8.3 8.1 7.8 7.4
Compensation of employees 4.3 0.1 3.8 4.0 5.0
Unit labour cost 3.8 2.6 0.9 1.6 2.0
Household disposable income 5.3 1.7 4.4 3.0 4.1
GDP deflator 4.0 -2.1 2.8 1.6 1.6
Consumer price index 2.4 0.3 1.6 1.7 1.5
Core consumer price index2 1.7 1.8 1.8 1.5 1.5
Private consumption deflator 1.6 0.5 1.2 1.5 1.3 1. As a percentage of labour force.
2. Consumer price index excluding the eight more volatile items.
Source: OECD Economic Outlook 88 database.
Canada
Source: Statistics Canada; Thomson Datastream; OECD Economic Outlook 88 database.
1 2 http://dx.doi.org/10.1787/888932345603
1990 1995 2000 2005 2010
0.15 0.16 0.17 0.18 0.19 0.20 0.21
Debt-to-assets ratio
Household debt remains at high levels
2007 2008 2009 2010 90
95 100 105 110 Public
Private Full-time Part-time
Employment gains have been led by public sector and part-time jobs
Index, October 2008 = 100
disposable income. More subdued house price growth should further curtail the wealth effects that had earlier propelled household spending.
With the construction and public sectors accounting for over half of the jobs created since the trough, employment gains are expected to ease.
Sustained strength in the exchange rate continues to pose challenges for the manufacturing sector, which is in the process of restructuring. The sectoral shift of resources that has accompanied this restructuring has 1 2 http://dx.doi.org/10.1787/888932347275
1 2 http://dx.doi.org/10.1787/888932347294
Canada: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 3.6 4.6 4.6 4.0 3.9
General government financial balance2 0.0 -5.5 -4.9 -3.4 -2.1
Current account balance2 0.4 -2.8 -2.7 -2.8 -2.1
Short-term interest rate3 3.5 0.8 0.8 1.6 2.8
Long-term interest rate4 3.6 3.2 3.2 3.3 4.0
1. As a percentage of disposable income.
2. As a percentage of GDP.
3. 3-month deposit rate.
4. 10-year government bonds.
Source: OECD Economic Outlook 88 database.
Canada: Demand and output
Fourth quarter 2010 2011 2012
Current prices CAD billion
Percentage changes from previous year, volume (2002 prices)
Private consumption 898.7 3.2 2.1 3.0 2.5 2.4 3.2
Government consumption 333.9 3.3 0.8 -0.3 1.8 0.1 -0.4 Gross fixed investment 328.5 6.6 4.8 2.6 7.2 4.0 2.1
Public1 58.2 11.7 -0.1 -8.8 4.5 -4.5 -9.0
Residential 99.0 10.3 0.4 3.2 3.0 3.0 2.7
Non-residential 171.2 2.7 9.5 6.3 11.0 7.7 5.4 Final domestic demand 1 561.1 3.9 2.4 2.2 3.3 2.3 2.2
Stockbuilding2 - 7.7 0.9 0.1 0.0
Total domestic demand 1 553.4 4.8 2.5 2.2 4.1 2.3 2.2 Exports of goods and services 438.6 6.8 5.3 9.4 5.6 7.0 10.7 Imports of goods and services 464.7 12.7 5.7 6.6 9.7 5.6 7.2
Net exports2 - 26.2 -1.9 -0.2 0.8
GDP at market prices 1 527.3 3.0 2.3 3.0 2.8 2.6 3.2
Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).
Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
1. Excluding nationalised industries and public corporations.
2. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
created greater skills mismatch and retraining needs that may slow the adjustment in labour markets, thus restraining income growth.
… but investment conditions are improving
The fundamentals for business investment have picked up alongside higher corporate profitability, strong financial positions and improved access to credit. Recent fiscal policy initiatives, including introduction of the harmonised sales tax, capital tax cuts and corporate income tax reductions, should lower the cost of capital and buttress investment intentions. These advances in capital formation rates should eventually drive productivity gains and enhance employment prospects.
Fiscal stimulus should be withdrawn as the recovery solidifies
Further stimulus, including public infrastructure investments, tax relief and support for the unemployed, is continuing to sustain growth in 2010. With a weaker US outlook curbing the expected speed of economic recovery, the federal government announced plans in September to scale back the planned increase in employment insurance premiums, resulting in a somewhat slower pace of stimulus withdrawal.
Barring a further deterioration in labour market conditions, governments should begin to withdraw stimulus and reduce structural deficits over the course of 2011-12 as planned so as to maintain investor confidence in the path towards public debt sustainability. As the economy recovers, consolidation plans will help return the total government budget close to balance in five years, in large part through restraining expenditure growth and trimming public sector employment and wag e increases.
Additionally, a small portion of deficit reduction will take the form of increases in taxes and user fees at the provincial level. The projection assumes fiscal consolidation is implemented as planned, with the total government deficit falling from 4.9% of GDP in 2010 to 2.1% of GDP in 2012.
1 2 http://dx.doi.org/10.1787/888932347313
Canada: External indicators
2008 2009 2010 2011 2012
$ billion
Goods and services exports 532.2 385.7 465.2 502 558 Goods and services imports 507.4 408.8 489.6 529 573
Foreign balance 24.8 - 23.1 - 24.4 - 27 - 16
Invisibles, net - 16.8 - 15.5 - 17.7 - 19 - 21
Current account balance 8.0 - 38.6 - 42.1 - 46 - 36
Percentage changes
Goods and services export volumes - 4.6 - 14.2 6.8 5.3 9.4 Goods and services import volumes 1.2 - 13.9 12.7 5.7 6.6
Export performance1 - 3.4 - 1.2 - 6.1 - 3.9 1.4
Terms of trade 4.8 - 9.5 6.3 0.3 - 0.1
1. Ratio between export volume and export market of total goods and services.
Source: OECD Economic Outlook 88 database.
Further monetary tightening should be delayed into early 2011
Despite narrowing for the past four quarters, the level of excess capacity remains sizable, and price pressures correspondingly weak.
Monetary policy remains very accommodative, although the Bank of Canada began to withdraw monetary stimulus, raising its policy interest rate three times since June to 1% before pausing in October. Further rate hikes should be delayed into early 2011 when a recovery in private demand is expected to gain a firmer footing, after which a gradual pace of tightening should resume.
The outlook is for a resumption of moderate growth
Real GDP growth is expected to strengthen progressively over the projection period. Gradual improvements in full-time employment should continue to support consumption increases. Business investment should remain robust, although greater uncertainty over the US recovery and excess capacity in commercial real estate markets are expected to rein back gains from recent heights. Most of the inventory correction has likely occurred, as stock-to-sales ratios are now back to more normal levels. The strong exchange rate will continue to depress export performance, but external demand and employment prospects should begin to pick up from mid-2011. While narrowing steadily over the projection period, the large output gap is likely to exert downward pressure on prices, so that underlying inflation should remain stable.
Uncertainties around the outlook remain wide
There are both upside and downside risks to the outlook. On the downside, a deeper slowdown in the global and particularly the US economy or a further appreciation of the Canadian dollar could damage business confidence, discourage investment, and weaken exports. Housing affordability has deteriorated significantly in certain regions, and a downward correction in house prices could undermine domestic demand. On the upside, the recovery could be faster if external demand proves stronger than projected, or if commodity prices rise beyond their assumed flat path.