Economy of 1996

To investigate the state of the Canadian economy, it is very useful to track
Canada’s six major economic goals: economic growth, economic stability, economic
efficiency, economic equity, viable balance of payments, and low unemployment. At a
given time, Canada is achieving some of these goals while falling behind on some of the others.

When taken all into consideration, these goals give an indication of how well Canada has been doing
and the stage of the business cycle the Canadian economy is in. In 1996-1997, Canada is
in slight recession and is only meeting the goals of economic stability, and viable balance
of payments.

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Canada can be said to be in a period of slight recession because there is a downswing
in economic activity. To confirm a true recovery, “an economy must show no growth for
two consecutive quarters.” However, Canada is not in a true recession because there was a
3.0% growth in the third quarter, compared to 2.2% in the second quarter. Eventhough it is not
true recession, the slow growth is a sure sign of a slight one. Low inflation is also
is also prevalent and is symptomatic of a weak economy. A low inflation rate of 1.4% in November
1996 does not provide much of an indication for economic growth and expansion. A shrinking positive
balance of payments indicates these are tough economic times. A fourth indication of a slight
recession is the high unemployment rate. An unemployment rate of 10.0% in November 1996 is
definitely not a sign of strong economic recovery.

Canada is always trying to work towards the goal of economic growth. Economic growth
is the percentage change of GDP over a period of time and is also known as the growth rate.
In 1996, Canada’s GDP has been increasing slowly since the first quarter. The GDP in the
first quarter was 1.8%, then increased to 2.2% in the second quarter, and in the third quarter
it rose to 3.0%. In this way, Canada has been experiencing steady growth. This goal is being
met because of the increase in consumer spending inspite of the government cutbacks. Consumer
spending levels tell producers what to produce, and how much to produce. If consumer spending
increases, it gives a signal to the producers to produce more which causes the increasing GDP.

The government cutbacks contribute does contribute to lower consumer confidence and, thus, slows
the economic growth. Slow, growth causes few jobs to be created as it means a slower rate of
expansion of industries. When there is slow growth, few jobs are being created, so it does not
help the goal of low unemployment. Slow growth also keeps inflation low. For example, in September
1996, the inflation rate changed from 1.3% to 1.2%. To stimulate economic growth, interest rates
must be kept low. For example, the bank rate decreased to 3.5% in November 1996. This encourages
businesses to borrow money and to expand. Increased exports also help stimulate economic growth,
because increases in foreign demand for Canadian goods and services may stimulate the domestic
markets.

The goal of economic stability has been achieved. In 1996, the inflation rate has been
relatively low. The inflation rate has been kept low as a result of consumer confidence.
Consumers were not willing to spend on expensive items with the current job picture. This has
contributed to the low inflation rate. For 1996, the annual inflation rate has been in
the 1.2% to 1.7% range. The CPI in November 1996 was 136.8, but in November 1995, the CPI was
134.1. Over the course of the year, the CPI has only changed 2.0%. The effects of stability
is that the purchasing power of Canadian currency remains more of less the same. With low
inflation, the value of the Canadian dollar, decreases very little. Inflation rate can be
tolerated if it provides an incentive for businesses to expand. There, low inflation is also
an incentive of economic growth. Low inflation prompts the banks to lower interest rates which
also encourages economic growth. Since there are trade offs when deciding whether to raise or
lwer the inflation rate, governments must keep in mind that high inflation is not healthy, but a
little inflation is a prerequisite for growth.

The goal of economic efficiency has not yet been achieved, but Canada has always
been progressing towards this goal. In Canada, technology has constantly been improving
and updating. If new technology is used, the economy can operate more efficiently, for
example, the Bank of Montreal has introduced branchless banking and, computers and machines
are replacing human labour. This saves the Bank of Montreal money in hiring workers and having
branches all over the city. The reason why Canada has still not met this goal is because they
are losing valuable skill in labour which also lends to efficiency. Not only are banks replacing
workers with computers, but even the government is trying to cut down on workers; for example, by
scraping the school boards. This means that skilled workers will not have jobs and, therefore,
workers are not used to their maximum efficiency. In the approach towards optimum efficiency,
Canada is increasing its competitiveness in the global market as well as chances for stronger
economic growth. The unemployment problem can be addressed through job creating programs.

The goal of equity has not been reached and the Canadian economy has been
regressing from it rather than approaching it. Income inequality is one sign of inequity.

There is income inequality between
The goal of viable balance of payments has only been achieved for some parts;
Canada had a trade surplus where the value of exports have exceeded the value of imports, but
in late 1996, that difference between exports and imports decreased. In September, the
exports amounted to 23.5 million and in October 21.1 million. While the exports decreased by
2.4 million, imports only decreased 0.7million (from 20.3million to 19.6 million).
With only a small trade surplus, Canada is not doing well in this area. It is because of the
capital account. Investment abroad was -9420 million in the third quarter while Investments
in Canada was only 1824 million, leaving the total capital account to be -7596 million.
This negative balance has the undesirable effect of slowing economic growth. As foreigners
invest in our country, they bring in valuable resources such as labour and capital.
To encourage a more viable balance of payments, the Canadian government can discourage imports by placing tariffs
which cause the price of imports to rise. Canadian industries can also improve exports
by increasing production. The government will have also have to increase their sales pitch
when trying to get foreigners to invest.

The goal of low unemployment has not been reached eventhough Canada has
persistently made attempts to reach it. In October 1996, the unemployment rate rose from
9.9% to 10.0%. This rate is quite high compared to the inflation rate which is currently less
than 2%! Unemployment has many negative effects. It causes income inequality which is
in direct contradiction to the goal of equity. Because of unemployment, consumer
confidence has dipped. The lack of jobs has caused consumers to hold back on many of
their purchases. This reduces retail sales and the production of consumer goods which
stifles economic growth. The unemployment rate and current economic conditions have
caused the unemployed to become frustrated at the job markets as it becomes increasingly
difficult to land a secure job. The banks are major players in the battle against
unemployment. Instead of sacrificing employment for lower inflation rates, the banks can
lower interest rates and stimulate economic and job growth. A second major player is the
government. Through retraining and job creation programs, the government can help the
unemployed increase the likelihood of obtaining a job.

In 1996-1997, Canada has been through a period of tough economic times. On the
average, Canada has been trying to meet its six economic goals. However, some economic
goals are contradictory, so to reach one goal, Canada cannot reach another. Therefore,
trade offs are made depending on the relative importance of a particular goal
in comparison with the other goals at a given time. Although the overall impression
of Canada’s current economy made by these six goals is not a particularily encouraging
one, it does provide hope for a better, stronger future economy.


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