Canada has been considered as one of the developed economies of the world that is closely integrated with the US economy owing to geographical position. It is part of the G7 that includes developed economies of UK, US, Japan, Germany, Italy, and France. The economy is centered on service industry that contributes nearly 67. 9 percent to the country’s GDP employing nearly 75 percent of its total working population of 17. 9 million. The GDP growth rate of the country is around 2. 7 percent in the year 2008 (EconomyWatch, 2009).
The chart below illustrates the GDP growth trend since the year 2004. GDP growth rate of Canada since ...
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...2004 (Source: Royal Bank of Canada – Economics Research 2009) The decline in the GDP growth rate is attributed to the financial crisis that has crippled major economic powers worldwide. The country is deeply impacted by the global recession that has created huge gaps in economic progress and development. According to economic research reports by Bank of Canada, a premier banking establishment in the country, the rate of economic growth declined by 2. 3 percent in the year 2008.
The Bank of Canada predicts a growth rate of 2 percent in the year 2009 that might reach to 3. 5 percent by the end of the year. The economic recession has slowed down the economic growth rate considerably and this is evident in the way various sectors of the economy have been affected by the sub prime crisis in US. The export of goods and services witnessed a decline by nearly 4. 7 percent in the past few months. Personal spending on goods and services too has dropped (Statistics Canada, 2009). The financial market crisis has caused stock markets to plunge by nearly 5 percent in the year 2008.
“For the economy, the spin-off continues to be that businesses and households face both a high cost for capital and limited access to funds, which is hampering spending activity and resulting in recession in both Canada and United States” (RBC, 2008). However, the Canadian financial system is well integrated and monitored by the government and this has insulated the economy to a considerable extent from the aftershocks of the recession. It is felt by leading financial institutions and banking establishments that the markets will revive by the end of the year 2009.
Inflation has declined considerably to 1. 6 percent in 2008 and is expected to drop to an average of 1. 2 percent in 2009. The bank interest rates have also been cut to revive the slumping economy. The Royal Bank of Canada reported a 29 percent decline in the wealth management revenues in the first quarter of 2009 due to the “impact of capital markets on fee-based client assets and transactions volumes” (RBC, 2009). Various measures are being undertaken by the banks in Canada to overcome the current challenges faced by the economy.
One such measure includes “quantitative easing” that involves direct addition of liquidity or money to the economy by means of expanding the bank reserves that is attained through purchase of financial assets by the central bank. The government of Canada too is implementing various measures to improve market conditions in the securitized lending market and it is felt that the “current mix of fiscal and monetary policy stimulus will be enough to save the economy from a deep and prolonged downturn” (Desjardins, 2009).