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An Outlook at the Canadian Economy

CAD

This year, the world’s economy has experienced better GDP numbers and positive media commentary. However, despite all these positive optimism, the U.S economy and the Euro-zone continue to be fragile and the momentum in Japan is tapering off. The situation is even worse in developing countries that are still facing various country-specific challenges, including increased financial risks, structural imbalances, incoherent micro-economic management, geopolitical and political tensions as well as infrastructural bottlenecks.

The Organization for Economic Co-operation and Development (OECD) recently published a report on an outlook at the Canadian economy. According to OECD, the Canadian economy appears increasingly vulnerable to recession as the country continues to grapple with the challenge of taking appropriate fiscal and monetary policy actions in the aftermath of the financial crisis. The international economic research and policy group forecast Canada’s economic growth to strengthen, but is highly threatened by substantial risks including still-high debt levels, divergent monetary policy, volatile markets and still-high financial instability amid a slowdown in China and the spread of the Ebola virus outside of West Africa.

Inflation continues to be a non-issue

The Canadian Chamber of Commerce in its 2014-15 economic outlook report states that the country’s economy is projected to strengthen moderately to 2.5 per cent in 2015, up from 2.3 per cent in 2014. This prediction is based on the IMF’s global financial and economic forecast that World Gross Product will grow at a pace of 3.3 per cent in 2015 compared to 3.0 per cent in 2014. The IMF report expects GDP to increase by 3.1 per cent in U.S., 7.1 per cent in China, 8 per cent in Japan, 2.7 per cent in U.K. and 1.8 per cent in Japan. The Bank of Canada reports that the country’s inflation remains well anchored. It is expected that inflation will remain within the bank’s 1.0 per cent to 3.0 per cent inflation-control range for the next two years.

Overall, there are signs of improvement for the world’s 11th largest economy. The Euro-zone is finally creeping out of the protracted recession and the U.S. economy continuing to recover. Majority of the emerging economies are starting to see accelerating economic growth characterized with growth in foreign direct investment (FDI) inflows, portfolio equity inflows and significant fall in non-bank credit flows. At present, the average rate of inflation in Canada and the U.S. is less than 2 per cent, around 2 per cent in the U.K., and below 1 per cent in the Euro-zone. In fact, even in countries in the periphery of the Euro-zone, such as Cyprus and Greece, prices have dropped recently compared to the previous year. However, for the country to reap full benefits of an improved global economic outlook, it has to tap new markets, strengthen its competitiveness, and secure and expand its involvement in global supply chains.

Major challenges and remaining fragility

Canada’s main growth challenge and fragility still remains lackluster international trade flows. These flows continue to remain the key policy concerns as long-lasting effects from the financial crisis continue to weigh on labor markets in the country. Vulnerability in emerging economies to both the external shocks and domestic structural bottlenecks, the remaining fragility in both the financial sector and the real economy in the Euro-zone, a possible escalation in geopolitical tensions and the risk of a failure in containing Ebola may also exacerbate any financial recovery. Other challenges include the risks and uncertainties associated with the divergence in monetary policies among the major developed countries, and QE exit and normalization of interest rates by the U.S. Federal Reserve.
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