Determine the State of Canadian Economy

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Canadian Economy

Assignment #1 Canadian Securities Course October 19, 2012
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Canadian Economy

Assignment #1 Canadian Securities Course October 19, 2012
Determining the current state of the business cycle
Determining the current state of the business cycle

Executive summary
The purpose of this research report is to determine the current stage of the business cycle that the Canadian economy is experiencing.
There are five stages in a business cycle – expansion, peak, contraction, trough, and recovery. These different cycles are characterized by the state and degree of the economic activities performed by the economic agents, and the condition of the business environment (Canadian Securities Course, 2011, p. 4-13).
I believe that the Canadian economy is currently in a slow recovery as indicated by the publically available information provided by Statistics Canada.

Introduction
The past four years has not been the easiest for the Canadian economy. The Sub-prime Mortgage Crisis, which hit all of the world’s major economies in late 2008, was followed immediately by the European Sovereign Debt Crisis that again hit the global economy. Canada is an integrated part of the world economy and it actively trades with all the other major economies. Therefore, it was inevitably affected by the economy downturn and has suffered from sharp reductions in its exports of natural resources and manufacture goods, which comprise of a large part of its GDP.
Having a much better capitalized and regulated financial industry in addition to lower National Debt, Canada was able to manage through the downturn, although suffered a significant reduction in the growth of its economy. As indicated in table 1, the Canadian GDP rebounded to very moderate growth from the slight dip in 2009. Table 1: Canadian Gross domestic product (Statistics Canada, 2012)
Economic indicators are widely used in characterizing the economic conditions and there are three types of indicators. Leading indicators are used to anticipate changes in the business cycle by indicating what businesses and consumers have begun to produce and spend. Coincident indicators provide information about the current state of the economy, and lagging indicators can confirm that a business cycle pattern is occurring (Canadian Securities Course, 2011, p. 4-16).
The activities that characterize an economy in recovery include the following: firms increasing production to meet the new demand; companies are still too cautious to hire back significant numbers of workers, nonetheless the period of mass layoffs is over; significant new investments are not yet made; meanwhile, unemployment remains high while inflation stays low (Canadian Securities Course, 2011, p. 4-13).
To determine the present state of the Canadian economy, I have gathered data from Statistics Canada, which shows that Canada is most likely experiencing a slow recovery from the recent economy crises. Statistics Canada provides key economic indicators and assessments of the current state of the Canadian economy on a regularly basis. To determine which stage of the business cycle the Canadian economy is in, I have gathered the latest economic data in addition to the previous period information from Statistics Canada.
Statistics Canada has historically provided an economic indicator named the Canadian Composite Leading Indicator. It was comprised of ten components that lead cyclical activity in the economy and together represent all major categories of GDP. It reflects the variety of mechanisms that can cause business cycles (Statistics Canada, 2012). Statistics Canada has terminated the use of this indicator in May 2012 and the last available data on the Canadian Composite Leading Indicators was published for April 2012.

Analysis
Table 2 shows the Canadian Composite Leading Indicators from November 2011 to April 2012. Because the data in this table are leading indicators, they serve to predict the direction and trend of the economy in the upcoming periods. Therefore, the data from six to eleven months ago in this table can be a good indicator of the state of the economy now.

Table 2: The Composite Leading Indicators, April 2012 (Statistics Canada, 2012)
According to table 2, the composite leading indicator rose gradually from 259 in November 2011 to 265.8 in April 2012, indicating a steady growth of the factors. Although this is merely a 2.63% gain, it shows that the economy has bottomed out and there is a sign of recovery of the economic activities.
Furthermore, according to the press release by Statistics Canada, the composite leading indicator rose 0.3% in April, which was the 10th consecutive monthly increase. Of the 10 components, 7 advanced in the month of April 2012. The indicators related to household demand, including by a rise in housing starts, supported the increase in April. Both furniture sales and other durable goods sales enjoyed a third monthly gain. The average workweek, however, declined after being flat for the previous two months. In terms of manufacture data, new orders fell marginally for two consecutive months, while the ratio of shipments to inventories was unchanged (Statistics Canada, 2012). This mixed picture of gradual improvements together with minor fluctuations in the ten indicators shows that the Canadian economy was posing for a growth in the near future, although it would not be as aggressive as investors would like.
Table 3 below illustrates all the latest data generated by Statistics Canada as of October 18, 2012. Within this table, personal income, GDP, and retail sales are the coincident indicators that provide information about the current state of the economy. According to the data provided, average weekly earnings rose 4.1% in July 2012, from a year ago. Meanwhile, GDP grew by 1.9% and retail trade increased by 3%. These data indicates that the Canadian economy has enjoyed a slight but positive growth for the past year.

Table 3: Latest Statistics (monthly), October 2012 (Statistics Canada, 2012)
The labour force characteristics, as surveyed by Statistics Canada, are summarized in Table 4, while the Consumer Price Index, which is used to measure the rate of inflation, is summarized in Table 5. These lagging indicators serve to confirm that a business cycle pattern is occurring. The sharp reduction of 7.5% in the regular employment insurance beneficiaries shown in table 3 as well as the merely 0.2% increase in unemployment rate shown in table 4 over the past year validates that the Canadian economy has recuperated during the previous year, and started to position itself for growth. The positive inflation of 1.2% from September 2011 to September 2012 is also consistent with this finding.

Table 4: Labour force characteristics, seasonally adjusted (Statistics Canada, 2012)

Table 5: Consumer Price Index (Statistics Canada, 2012)
In addition to the research findings, the statement made by the Canadian Finance Minister Jim Flaherty further confirmed that the economy is going through a slow recovery. “We expected moderate growth, the economists in Canada told us to anticipate moderate growth…” Flaherty told reporter on October 18, 2012. (Financial Post, 2012)

Conclusion
As Canada’s central statistical office, Statistics Canada is the most credible source for accessing data regarding the Canadian economy. The data it has compiled shows that the firms operating in Canada has gradually increased their inventories in order to meet the improved retail sales. Firms have stopped large-scale layoffs even though they are still extremely cautious on hiring decisions. Moreover, the overall unemployment rate has not eased, and inflation remains very moderate. In conclusion, I believe that the current data concerning the Canadian economy is consistent with the characteristics of an economy in the recovery stage of the business cycle.

References

CSI Global Education. (2011). Canadian Securities Course. Volume 1.

Financial Post. Canada may have to cut economic outlook: Flaherty. (2012, October 18).
Retrieved from http://business.financialpost.com/2012/10/18/canada-may-have-to-cut-economic-outlook-flaherty/

Statistics Canada. Canadian Composite Leading Indicator. (2012, October)
Retrieved from http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=1601&lang=en&db=imdb&adm=8&dis=2

Statistics Canada. Canadian Composite Leading Indicator. The Daily. (2012, May)
Retrieved from http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/cpis03a-eng.htm

Statistics Canada. Gross domestic product, expenditure-based. (2012, October)
Retrieved from http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ04-eng.htm

The Macdonald-Laurier Institute. (2012, October).
Retrieved from http://www.macdonaldlaurier.ca/files/pdf/MLILeadingIndicatorAugust2012V5

References: CSI Global Education. (2011). Canadian Securities Course. Volume 1. Financial Post. Canada may have to cut economic outlook: Flaherty. (2012, October 18).