Recent Developments in the Canadian EconomyJune 2012

Bank of Canada

Dr. Farid Novin

The Views of Farid Novin presented today may not represent the views of the Bank of Canada

2

Outline

World Economy

The United States

Canada and BC

3

The World Economy

4

Chinese growth is decelerating towards a more sustainable level

5Source: IMF

Real GDP Y/Y % change

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

2

4

6

8

10

12

14

16

China India

6

The recovery among major economies continues to be uneven

Real GDP Y/Y % change

Source: IMF, Stats Canada

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-10

-8

-6

-4

-2

0

2

4

6

UK USA Japan Germany Canada

7

Striking divergences are apparent between the unemployment rates of core and peripheral economies in the euro area

2007 2008 2009 2010 2011 20120

5

10

15

20

25

Germany Spain Portugal Greece France Italy

%

Chart 8:Unemployment rates, monthly data

Last observation: January and February 2012Source: Eurostat

8

Central banks in advanced economies have maintained policy interest rates at historically low levels

2008 2009 2010 2011 20120.00.51.01.52.02.53.03.54.04.5

Canada United States Euro area Japan

%Chart 1:Policy interest rates, daily data

Last observation: 13 April 2012

Note: On 5 October 2010, the Bank of Japan changed the target for its policy rate from 0.1 per cent to a range of 0.0 to 0.1 per cent. The U.S. Federal Reserve has been maintaining a target range for its policy rate of 0.0 to 0.25 per cent since 16 December 2008.Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of Japan

9

Some central banks have expanded their balance sheets further

United States Euro area* United Kingdom0

2

4

6

8

10

12

14

16

2011Q2-2011Q4 2007Q2-2011Q2

Percentage points

Chart 3:Change in total central bank assets relative to GDP

Last observation: 2011Q4

* The bar for the euro area represents balance sheet changes of the European Central Bank andnational central banks of those European member states whose currency is the euro. Sources: Eurostat; European Central Bank; U.S. Bureau of Economic Analysis; U.S. Federal Reserve;U.K. Office for National Statistics; Bank of England; Cabinet Office, Government of Japan; and Bank of Japan

1010

Large deficits remain a problem for many countries...

Deficit as a % of GDP, all levels of government

Source: IMF

Canad

a

Greece

Italy

Spain

German

y

Japa

n

-35

-30

-25

-20

-15

-10

-5

0

2010 2011 2012

US economy

11

12

US GDP and Final Domestic Demand

(volume, y/y % change)

Source: US Bureau of Economic Analysis

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-6

-4

-2

0

2

4

6

8

GDP FDD

13

U.S. real GDP growth is projected to remain relatively modest compared with previous U.S. recoveries

-2 -1 0 1 2 3 4 5 6 790

100

110

120

130

140

Min U.S. current cycle Dateline Series7

IndexChart 9:U.S. real GDP across economic cycles; start of recession = 100, quarterly data

Note: The Big Five modern financial crises, as described in Reinhart and Rogoff (2008) , are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992).See C.M. Reinhart and K.S. Rogoff, "Is the 2007 U.S. Sub-Prime Financial Crisis So Different?An International Historical Comparison." American Economic Review: Papers and Proceedings 98, No.2 (2008): 339-44.Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections

Start of the recession

Years after the start of the re-cession

Years be-fore thestart of the recession

14

Fiscal consolidation is expected to exert a significant drag on U.S. real GDP growth

2011 2012 2013 2014-3-2-1012345

GDP growth excluding fiscal policy Estimated contribution from fiscal policySeries4

%Chart 10:Annual data

Note: The contribution of fiscal policy to growth includes both direct government expenditures and the indirect effects on other components of aggregate demand. The estimated contribution over history has been re-assessed in light of additional information on U.S. government spending.Sources: U.S. Bureau of Economic Analysis and Bank of Canada calculations and projections

Canada and B.C.

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-6

-4

-2

0

2

4

6

GDP FDD

Canadian GDP and Final Domestic Demand

16Source: Statistics Canada

(volume, y/y % change)

17

Real GDP is expected to grow at a moderate pace

2008 2009 2010 2011 2012 2013 2014-10-8-6-4-202468

Quarter-over-quarter percentage change in real GDP, at annual ratesBase-case projectionBase-case projection

%Chart 24:

Sources: Statistics Canada and Bank of Canada calculations and projections

18

2006 2007 2008 2009 2010 2011 201294

96

98

100

102

104

106

108

110

B.C. Canada

Employment is now above pre-recession levels in B.C.

Source: Statistics Canada

Index 2006Q1=100

BC employment level before the recession

Commodity prices

19

Source: Bank of Canada

Index 2006=100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

100

200

300

400

500

600

Oil Copper Lumber Nat. Gas

Private and Public Sector Investment

Source: Stats Canada

* Intentions

(y/y % change)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

* -20%-15%-10%-5%0%5%10%15%20%25%

BC Canada

Mineral exploration spending in BC has reached an all-time high

21

$ Millions

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

100

200

300

400

500

600

700

800

900

BC’s forestry industry has been severely affected by the US housing recession

Source: BC Stats

Exports ($millions)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

2,000

4,000

6,000

8,000

10,000

12,000

Wood products Pulp & paper products

However, efforts to grow Chinese demand for BC’s softwood lumber have been very successful

Share of BC softwood lumber exports by value (%)

Growth in value of softwood lumber exports to China (y/y% change)

Source: BC Stats23

2006

2007

2008

2009

2010

2011

2012

YTD

-20%

0%

20%

40%

60%

80%

100%

120%

20%

51%

80% 78%

112%

62%

-3%

01020304050607080

United States JapanChina

24

Excess supply remains in the Canadian economy

2007 2008 2009 2010 2011 20120

10203040506070

-4-3-2-10123

Some and significant difficulty* (left scale) Labour shortages** (left scale)

Conventional measure of the output gap** (right scale)

% %Chart 22:

Last observation: 2012Q1

*Response to Business Outlook Survey question on capacity pressures. Percentage of firms indicating that they would have either some or significant difficulty meeting an unanticipated increase in demand/sales.**Response to Business Outlook Survey question on labour shortages. Percentage of firms reporting labour shortages that restrict their ability to meet demand.***Difference between actual output and estimated potential output from the Bank of Canada's conventional measure. The estimate for the first quarter of 2012 (indicated by *) is based on a projected increase in output of 2.5 per cent (at annual rates) for the quarter.Source: Bank of Canada

25

Table 1: Projection for global economic growth

26

Table 2: Contributions to average annual real GDP growthPercentage pointsa

27

Table 3: Summary of the base-case projection for Canadaa