By Teresa Kersting
This article was first published in Heavy Lift magazine.
Canada weathered the global economic crisis thanks to its strong banking system and relatively robust exports and the country is now on track for solid growth in 2014 and 2015. Abundant natural resources and its close ties with the United States have benefitted the country’s economy, particularly the external sector. However, Canada’s heavy reliance on its southern neighbor also make it vulnerable to external developments. Unlike many other developed economies, the primary sector, particularly the oil industry, is still very important to the economy.
During the 2008 economic crisis, Canada’s solid banking system, a sound pre-crisis fiscal policy and the economic strength of its resource-rich western provinces buoyed the economy. Since the economic slump the country experienced in 2009 when GDP contracted at an annual rate of 2.7%, Canada has reemerged as one the strongest advanced economies. From 2010 to 2013, GDP grew at an average annual rate of 2.4%. Growth was strongest in 2010, when a 3.4% expansion was tallied. Growth moderated in recent years with GDP expanding 2.0% in 2013.
Canada’s exports accounted for approximately 31% of GDP in 2013. Exports share of GDP has declined over the course of the past decade. Canada has tallied trade deficits after the recent global financial crisis led to a large decrease in exports to the U.S. in 2009. Nevertheless, total merchandise export growth picked up again in 2010 and yielded an annual growth rate of nearly 18% in 2011. Following this recovery, in 2012 and 2013 the pace of export growth moderated to nearly flat readings and in 2013 Canadian exports reached USD 465.4 billion. Imports contracted 0.5% over the previous year in 2013, totaling USD 472.5 billion. As a consequence, in 2013 the country recorded a trade deficit of USD 3.5 billion, which represented an improvement over the USD 7.2 billion deficit recorded in 2012.
Energy products are the country’s main exports product, accounting for approximately 24% of total exports in 2013. Crude oil and crude bitumen constitute the largest share of this category at approximately 17% of total exports. Additional main export categories include motor vehicles and parts (14% of total exports), metal and non-metallic mineral products (11% of total exports) and consumer goods (11% of total exports). The biggest market for Canadian export products is the U.S.—the country receives 75.0% of total exports. The country is also part of the G7 and is member of the North American Free Trade Agreement (NAFTA). After the U.S., the European Union and other OECD countries constitute the next largest export destinations, yet they only receive a meagre 4.0% of the country’s exports each.
Regarding merchandise imports, consumer goods account for 20% of total imports, followed by motor vehicles and parts (17% of total imports) and energy products (11% of total imports). To reduce its dependence on the U.S., Canada has recently increased its efforts to foster trade with other regions. For instance, it received preferential access to the European Union via the Comprehensive Economic and Trade Agreement that was negotiated recently and it joined the Trans-Pacific-Partnership talks, which are intended to reduce Asian trade barriers.
Some important challenges have yet to be addressed. Even though Canada has largely benefitted from its close trade relationship with the U.S., its small degree of regional diversification represents a risk to its export-driven economy. Business investment and exports have not yet fully recovered from the 2009 slump. The country strengthened its banking system by tightening banking supervision regulation and increasing the bank’s capital requirements. However, analysts point out that the banking system still has a “too big to fail” issue due to the high level of banking concentration. Moreover, house prices and household debt rose substantially since 2007 even though the government repeatedly modified mortgage rules to cool the market. This led market analysts to point out the potential negative impact that an eventual correction in the real estate market may have on the economy.
Public debt rose to 33.4% of GDP in 2013 as the government adopted an USD 57 billion fiscal stimulus plan in 2009. However, the government intends to return to a balanced budget in the 2015 election year and the fiscal deficit was reduced from 2.7% of GDP in 2009 to 0.9% of GDP in 2013. Critical voices argue that balancing the budget so soon may cost the economy much needed jobs; in 2013, the unemployment rate stood at 7.1%. The Central Bank has kept the overnight lending rate at 1.00% since September 2010
Canada’s economic outlook remains stable and FocusEconomics Consensus Forecast panelists* project the Canadian economy to expand 2.3% in 2014, which is unchanged from last month’s projection. In 2015, economic growth is expected to pick up to 2.6%.
* Note: The Major Economies Consensus Forecast is a monthly forecast based over 250 different sources including investment banks, consultancies and think tanks. For more information, please visit www.focus-economics.com.