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The Econo Miss

by Archives January 8, 2008

Canadians have been riding high on the euphoria of a strong Canadian dollar and great demand for commodities. We ring in the New Year however, with warnings from economists and a cautious federal government.
In October, the International Monetary Fund predicted the growth of the Canadian economy would be an estimated 2.3 per cent, since then however, the IMF has changed its tune and the forecast is less than the estimated amount. In the coming year, Canada will need to concern itself with external pressures, especially from the United States, straining economic growth. The United States is Canada’s largest trading partner and what happens south of the border will affect us, no matter how strong the global demand for our resources is. In December, the sale of single family homes in the States hit a 12-year low and house prices in 20 of the largest American cities fell to new lows. Americans will be selling their homes for much less than they are worth. As if that wasn’t enough, last week saw rising defaults – when people are unable to pay their debts – in the commercial real estate sector as well, because low interest rates have left commercial property owners unable to handle loans. The American economy is predicted to slow down even more and we are hearing the dreaded “R” word – recession.
In spite of the problems of the United States, the economy could remain stronger than expected in the coming year. The federal government has been taking some steps to cushion Canada if the United States experiences further financial woes. The Bank of Canada has cut interest rates in December and it is expected to further cut rates in the first quarter. The budget has been tailored to promote stability and the paying down of debt. The federal government is taking the same steps an individual would if they were faced with a reduction of income: pay down debt and have enough money to serve as a comfortable cushion.
The federal government has also recently approved legislation which would decrease federal corporate income tax down to 15 per cent by 2012. This is right in line with the IMF’s recommendations for creating a more competitive and lax atmosphere for companies operating in Canada. This is good news for foreign investors and companies like British Petroleum that have had their eyes on the oil rich and politically stable Alberta oil sands.
The American and Canadian stock markets are holding up, despite the problems of credit and housing in the United States. The huge amounts of money that are going in are not challenged by excessive selling and this is good news for Canadian commodities. Since 2002, the Canadian dollar has been appreciating with and reacting to the rising price of commodities and it is predicted that this will continue to be the case in the coming year. Canada has been the fastest growing economy in the G7 and we continue to enjoy the fruits of budget surpluses, low inflation and economic structural reform.

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