Recession is an economic word meaning ‘whenever an economy has two consecutive quarters or six months of negative growth in GNP/GDP’ (Kind and Cushman, 1997). So generally it refers to declining business activity phase of various business cycles. It usually affects major economic performance indicators like employment, real GDP, retail and wholesale business. A continuous recession period may result into a depression that saw a collapse of financial markets world wide in the early 1930s. A fall in GDP by more than 10% is what’s usually seen as a depression. A recession has got several causes but of major prominence is the monetary policy action by the central bank to control money supply in a given economy (Recession.org, 2008). This study is going to have a central attention in answering the question, what is the economic impact of 2008 US recession on Canadian economy?
In the year 2008, United States of America has had a witnessed period of recession leading to a decline of performance of the economy. A major characteristic of this recession is the credit crisis which has led to the bankruptcy of large investment banks and stable organizations like the AIG insurance company, high rates of inflation, high prices of food products, high unemployment levels, a fall in the stock market and a fall in housing prices among others. (Recession.org, 2008). Of recent major effects of inflation is the falling of the Dow Jones, which is a major industrial economic indictor, to below 10,000, the lowest in the last four-year period. Since 1990 there has been three recessions in the US, for instance; between 1990-1991, between 2001 and 2003 and the more recent one of 2008 and which has not yet diminished to date.
Before analyzing the economic impact of 2008 US recession on Canadian economy, it is essential to first analyze the past relationship of these two economies. The Canada-US bilateral trade capacity is the biggest worldwide. In the year 2006 alone the total amount of their imports and exports was about 533.7 billion US dollars. These two economies are integrated at high levels. As a matter of fact, there is the US-Canada F.T.A (Free Trade Agreement) which was set in 1988 and NAFTA (North American Free Trade Agreement) of 1994. These two economies are similar (but not identical) in terms of structure of their industrial sector and living standards.
However, both economies differ in terms of size, net savings and income per person. One other major dissimilarity is that the US economy is about 11 times that of Canada in terms of Gross Domestic Product (based on 2006 statistics). Judging from this information they are both important economic partners of each other. Through their free trade, the biggest stake is taken by the automobiles. Canada exports a great deal of its energy to the US. It’s the biggest energy supplier to the US. Also of great importance is their stakes of each others FDI (Foreign Direct Investment). These two economies have however suffered greatly due to terrorist attacks, for instance the year 2001 terrorist attacks were highly focused on their common border. (Fergusson F, 2006)
Canada has been performing very well economically, as a matter of fact it has been featured among the best performing among the members of the Organization for Economic Co-operation and Development (OECD). OECD has a membership of 30 European nations besides Canada, which is a North American nation. It has been able to gain very big economic achievements courtesy of their well organized policy frame-works. It has as well been able to benefit from the witnessed growth in the entire globe in the recent past. This has led to Canada’s ability to fight various shocks, which have occurred recently by the shifting of capital and labor force from the manufacturing sector to the services sector and the resource sector. This has led to high rates of employment in the economy of Canada. However, the recent recession of the US economy has highly affected this Canadian economy negatively together with its falling net exports.
It is also believed that there are further challenges yet to be met by this economy. To deal with the predicament, there is a big task to be tackled by the Canadian government’s monetary policy. Prospects are that there will be a smaller surplus in the budget, health costs will also rise besides other costs to be met by the government. Also the ones responsible for the policy making are facing struggles due to the unanticipated shocks globally. For example, the rising food, oil and other goods and services prices, which are essential in the economy, are causing high levels of inflation. Also, of emphasis to them are the world financial market downward trends. For instance, the New York stock exchange financial crises are being witnessed to have an impact on the Canadian financial market best indicated by the TSX (Toronto Stock Market) falling index. (Organization for Economic Co-operation and Development, 2008)
To analyze the impact on the Canadian economy by the US recession of the year 2008, several economic factors will be put in focus. These are going to be tackled in this order; fall in housing prices, decline of business in Canada’s stock exchange, rise in unemployment rates and last but not least, decrease in wholesale business especially due to automotives and lastly but not least, the general impact on Canada’s economic growth. Generally the impact is a negative one, though, not in totality. Also in focus is the positive impact of this US recession on Canada.
Firstly, the fall in housing prices is a major factor that can be used to explain this impact. In the US housing prices have been witnessed to fall more sharply in the year 2008 than any other economy. The more the decrease in the price of real estates the more there will be a fall of the economic performance of various other economies. Canada had its economy grow by a very low 0.1 percent between April and June and housing prices were in the same period weakening. (CRS report for Congress). The US fall in housing prices is believed not only to be a problem of the US, but also Canada’s. With the current economic crisis in the US, the same is predicament is seen to be extending its branches to Canada.
Mr. Peter Hall, who is the Canada’s vice president and Chief Economist, said that ‘other countries are also beginning to share the unwanted limelight’. The housing and mortgage corporations in Canada recorded an adjustment downwards, though, a slight one. The figures showed a fall by 9,900 units. Housing figures remain at a high of 217,800 units. The vice president warned that since the housing market is taking a tailspin in most of the largest economies in the world, Canada is also set to face these worse times soon. This housing industry has had an uninterrupted booming business just before this decline. Other large economies facing the housing problem may include the United Kingdom, France, Germany, and Japan among others.
Secondly, due to the current global economic recession stocks in North America declined in price by about 30%. These were high declines witnessed in January, August, September and October. These multiple crises in the US financial market caused great declines both in the US and other countries partnering with the US in trade. TSX (Toronto Stock Exchange) has as well registered a high decline. The Toronto stock market got an 840.93 point decline as a bailout bill was being voted against in the US parliament. After this bill was rejected the TSX Index fell by about 954.68 points to settle at 11,171.32 points. The only other year when such a fall was witnessed was in year 2000 in October 25th when TSX had an 840.26 loss.
This 2008 loss accounted for about 6 percent decline of business in Toronto stock market. Mining together with energy stocks were especially hard hit. These major stocks in TSX were thought by market speculators to have declined in high amounts due to the fear of the US financial crisis which is seen to be crimping the global economy, which may lead to a fall in demand for oil. Despite this major loss in TSX, a further fall was witnessed though in small amounts during later days of trading. The above predicament together with other has led to the Bank of Canada reducing its target interest rates to about 2.25 percent down from the previous 3 percent (Gloomberg.com, 2008). The bank also hinted that it’s of necessity to have further cuts if the situation persists. It also issued warnings on Canada’s future outlooks on its economy.
Thirdly, in terms of employment, the spreading recession affecting the biggest pillars of the economy and the financial markets, is estimated to have a negative impact in future. With around 6.1 percent current levels of unemployment in Canada while in the US it stands at 5.5 percent, the current effects of this recession are mild. Employment rates in most of Canada’s sectors and geographic regions are expected to decline. Suggestions are that measures to support incomes and insurance on job loss should be strengthened. Further, public infrastructure together with projects aimed at reducing greenhouse effect and provision of affordable houses, to maintain these reasonable levels of unemployment.
There’s also a very slim balance in the Federal budget and it may be seen to fall into a deficit due to the fall in the levels of real GDP. To maintain the federal budget balance however, the Canadian government has to affect high cuts in public expenditure. This move though, may have a negative effect on economic growth and job creation. Therefore, maintenance of the current programs by the government may help hold up the income and employment levels. The bank of Canada’s support should also be intensified, especially on the finance sector by reducing the rates of interest. Regulation of the financial markets is also seen by the Canadian government to require re-regulation to avoid uneconomic speculations, which are seen to be party to the current financial crises globally. (Economist.com, 2008)
Lastly, as of towards mid-October 2008, there has been a substantial fall in the automobile industry. This sector hit a five month low in August of 2008, dropping by 1.5% to Canadian dollars 45.7 billion. Other wholesales excluding this sectors rose by 0.5% in the same period. In August 2008 automotives sales solely declined by about 11.7% to Canadian dollars 7.0 billion; this offset the profits from other wholesale products over the previous months. Imports of trucks only fell by about 29 percent in August to register a four-year low, over the past four years. The automotive sector has been one of the major forces of the gains in the wholesale industry over time. Wholesale of inventories however, registered a rise in the month of August by 0.6% (Economist.com, 2008).
Canada is arguably the 8th largest economy in the world and thus the analysis of its economic performance is of great importance. Commenting about the general impact on the economic growth, Michael Woolfolk said ‘There is no doubt that the recession in the US economy is going to have a negative impact on Canada’ from the New York Mellon bank. The prospects are that the recession in the US will force the Canada’s economy to have a contraction. For instance, GDP was set to fall by 0.4% between January and March of 2008.
The bank of Canada in the year 2008 will fall to 1.1% down from 2% which was previously predicted. Canada’s government also reported that its economy was showing signs of negative effects by the US economy are hitting a slump. For example, the economy of Canada growth pace in 2008 was the slowest compared to other years since 2003. The current account (Net exports) alone went into a deficit since the year 1999, in quarter four of this year. The falling of exports to the USA will have an impact of the lowest percentage of economic growth of 1.8 percent in seven years according to the bank of Canada. It’s estimated that 75 percent of exports are sent to the USA and therefore Canada can not escape this recession in the US. (Gloomberg.com, 2008).
The recession in US has not only had a negative impact on the Canadian economy but also a positive impact. As the US economy suffers recession, Canadian economy is at some instances reaping some gains from the confusion. Positive trade terms are boosting income levels especially because of the improving exchange rates with the US dollar. This is further credited to the Canadian economy’s ability to flex itself through these times of difficulty.
Canada is therefore; set to perform better than the US economy in 2008 and onwards to 2009 despite the high levels of integration of the two economies. The Canadian dollar is being seen to have gained a lot against some of the world’s most hard currencies and in October it had reached the highest value against the US dollar. This will in turn have a positive impact on the exports of Canada to the US and other big economies like the UK. Also the high rates of job losses in the manufacturing sector are prospected to be offset by other sectors and thus, the impact of the slow performance by the US economy will further be neutralized. It’s also reported that if this so happens, Canada will stand at similar levels of unemployment with the US since 1982.
While concluding on this analysis, it is important to realize that the current situation of recession in the US might be seen by some economists as not yet. Further more its being seen as more of a global predicament than it is to the US only. However, it’s prudent to use the findings of the study to make a comprehensive conclusion. These crises in the US to conclude with are seen to have a mild impact on the Canadian economy. For instance, the impact on the employment levels is not very much as of October 2008, but most economists in Canada predict worse times to come. The other sector seen to be less affected is the wholesale business sector. The only major player in this sector that’s found to struggle is the automotive industry. Therefore, it is not mistaken to say that most impact was felt in sectors with a direct integration to the US economy.
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Organization for Economic Co-operation and Development, 2008. An Economic Survey. Retrieved on October 21, 2008, from www.oecd.org/bookshop
Recession.org, 2008. Recession History. Retrieved on October 21, 2008, from http://recession.org/
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