Value through Innovation18 April 2014

Economic situation: crisis weathered well / modest growth expected

Canada’s economy has weathered the economic storms of the last three years in a way that many nations might envy. The unemployment rate is lower than many of the industrialised nations.

The country has a strong currency (although this can negatively impact Canadian exports) and the structurally sound Canadian banking system contributes to a high level of financial security. But Canada is also confronted by challenges that it must manage with care. There is also rising debt.

Large debts
Canada’s household debt burden climbed to yet another record high in the third quarter, prompting Bank of Canada Governor Mark Carney to call it “the greatest risk to the Canadian economy”. At 150.8 %, Canada’s debt to income ratio is now higher than that of the USA or the UK. Meanwhile, observers have warned that the decline in household net worth today makes Canadians more vulnerable to adverse economic developments.

There is a widely held view that household debt will not seriously threaten the economic cycle in the coming year, because of low interest rates and slight recovery in the jobs market. The debt burden is, however, likely to continue to increase.

Unlike the USA, Canada’s consumer recession was “very mild”, which gives grounds to assume that Canadians hardly have any pent-up demand where consumption is concerned, thereby offering scant growth potential from this part of the economy.

Instability in the Eurozone
The Canadian economy is forecasted to grow by around 1.7-2.0 % in 2012, which, among other factors, is attributable to the deepening fiscal crisis in the eurozone.

In the event of a deepening recession in Europe, the world economy will continue to be negatively impacted. Canada will also suffer due to lower raw material prices, dwindling confidence and declining export growth.
Most (national, regional or local) governments are under great financial pressure due to the economic slowdown and declining income.

The Province of Ontario, which contributes decisively to the Canadian economy, is, for example, bringing forward considerable spending cuts for 2012. The province is battling with a weak economy and a deficit of some CAD 16 billion. Furthermore, influential rating agencies that evaluate bonds are threatening to downgrade the province‘s creditworthiness, which is increasing the pressure on the Liberal government to cut costs.

A commission set up for this purpose is to investigate how Ontario can reform its public services with a view to reducing related costs. All governments in Canada are looking for ways of providing public services more economically.