Macro Economic Policies In Canada

The Canadian Government and Macroeconomic Policies

It’s good to look at monetary and fiscal policies in terms of macroeconomics now that the Liberal party has been in charge of the Canadian government for shortly over a year now and to see what changes Prime Minister Trudeau’s party has been able to accomplish in the beginning of his first term. I will briefly discuss topics such as inflation targeting, the reason for the low currency rate for the current value of the Canadian dollar, unemployment rates, debt-to-GDP ratio and economic growth. By going over these concepts we can establish a firm basis of how the economy is doing overall in Canada today. Monetary policy is an important factor when dealing with inflation targeting and interest rates. The central bank of Canada controls
monetary policy by controlling the supply of money which is aimed at ensuring the stability and trust in in policy measures (pg146 DPE). The bank of Canada is sticking to their current monetary policy decision for the next 5 years until 2021. This means they are keeping their goal 2% inflation target to try and help keep low and predictable price growth in order to protect Canadian purchasing power and create employment.1 The bank of Canada is going to be switching analysing core inflation measurements to CPI-common, CPI-trim and CPI-median as their new metric analysis methods. The inflation rate is measured by price indexes (pg61 DPE). These measurements are going to measure inflation rates based off of common price change statistics, calculations that will excludes extreme outliers from their sample and a median sample of the price change. The combination of these three measurements is expected to give better future predictions for inflation then relying on the single core inflation measurement. To make the inflation target more sustainable and easier to accomplish the Bank of Canada keeps Canada’s exchange rate flexible as a buffer to help the economy adjust or absorb any external or internal shocks throughout the year. Having a flexible exchange rate over a fixed exchange rate gives the Central Bank of Canada the ability to support fiscal policy with monetary policy and it helps sustain the free-market economy system (pg180 DPE). As an overview the main goals the country is trying to achieve through their monetary policies are to encourage long-term investment in Canada’s economy by creating sustainable employment and being able to produce better productivity. While already on the topic of currency currently the rate of the loonie has been at an all time low for the past year and it isn’t looking like it is going to get any better soon.
Economist forecasters are even predicting that the loonie could drop even further to 65-cents compared to the US dollar counterpart. The cause is due to the OPEC agreement to cut oil production and the policy changes Donald Trump is aiming to change for the United States. If Trump’s administration puts its protectionist measures into effect it will seriously increase the risk of further weakening of the loonie. Some interesting facts to note are that the worth of the Canadian loonie when related to the US is that just comments released to the press or tweets alone made by President Donald Trump can cause the Canadian currency to go up or down.4 On a more positive note J. P. Gervais an agriculture economist believes that the dollar will stay around 75 cents and believes that this forecast is better for Canadian agriculture.4 It will help Canada be more competitive in foreign markets and the cost of doing business should go up, but at the same time increase the price of fertilizer and fuels to
consumers.4 Moving along let’s now looks at Canada’s unemployment rate. Based off of the statistics presented by StatCan for February of 2017 Canada currently is at an all time low based on the rates from the last 2 yeas with an unemployment rate of 6.6%. 15,300 jobs have been added to the national labour market and several economists are finding that there has been a major swing of people in the labour force either moving or leaving part-time employment (90,000 people) to full-time positions (105,000 people).5 Statistics Canada has said that overall in the past year there has been a net increase of 288,000 jobs5 in the labour market. As involuntary part-time rate falls it is an indicator that times are getting better for workers and that we should be slumping back into another hard recession and lead to eventual inflationary pressures (pg77 DPE). Other interesting statistics to note is that there is a 5.2% unemployment rate among Canadian women and 5.9% unemployment rate for Canadian men over the age of 25. To keep the unemployment low the Bank of Canada is going to hold on to the 0.5% interest target.5 Ontario is facing its seventh straight month of employment growth and has an unemployment rate of 6.2%, an all time low since October 2007.5 The expected unemployment rate is predicted to stay stable and optimistic with the continual growth of the country. We shall now examine Trudeau’s fiscal framework that the Liberal party has promised to achieve on their platform. One commitment they promised was to lower Canada’s debt-to-GDP ratio to 27% at the end of his 4 year term. The debt-to-GDP ratio is a measure that evaluates the debt levels of the country by examining stock-to-flow ratios that determine if the country has enough income to afford the level of debt they are under (pg120 DPE). Economists are sceptical about the liberals actually being able to achieve their low rate since it’s been increasing slightly since Trudeau has taken office. The debt-to-GDP is predicted to be 31.1% for 2017-2018, but with the ratio so high it is hard to see how feasible their goal will be for them to hit 27% for 2019-2020. The government calculates the ratio by dividing the total federal debt by the size of the economy measure as nominal gross domestic product.6 Fiscal policies are on a downturn with the falling oil prices and the government is already starting to back out of their promise to cap the annual deficit at $10 billion with forecasters calculating a running of an $18-billion deficit, which is already $2-billion over what they had proposed in their election campaign.6 There is still hope for liberals to achieve the 27% is the nominal GDP grows faster than expects and if the government takes better control on their revenues and spending.6 Overall Canada currently has the lowest debt-to-GDP ratio in the G7 and if the country keeps focusing on the goal of lowering it I believe over the next couple of years achieving this goal is possible, but not guarantee while Trudeau is Prime Minister’s during his first term. Overall the general economy under Trudeau’s government is doing fairly well, the real level of GDP is expected to grow by 2.3% with the real GDP being the inflation-adjusted measure of all goods and services produced in a year in an economy (pg53 DPE). The Conference board of Canada is expecting the performance to increase from 2016 due to increasing exports, which lead to the increase in net exports and a higher real GDP. This is going to increase consumer spending, rebound the housing market, but decrease imports. The Canadian economy is looking fairly well and with the current government and pressure from the public the country is headed in the right direction as long as it continues to strive to achieve the goals it has set out to accomplish.