E i O tl kEconomic Outlook
OttawaChamberofCommerce/OttawaBusinessJournal:Mayor’sBreakfastSeries
Ottawa,Ontario
27April2012...
Agenda
Three global forces
The consequences for Canada
The current outlook
What must be done?at ust be do e
2
Global Forces:Global Forces:
The Rise of Emerging Market EconomiesThe Rise of Emerging-Market Economies
3
Very robust growth in emerging markets
Real GDP, Index 2007Q1=100, quarterly data
150
160
150
160
Index Index
Real GDP, In...
Very robust growth in emerging markets
Real GDP, Index 2007Q1=100, quarterly data
150
160
150
160
Index Index
Real GDP, In...
Emerging markets now account for bulk of growth
Contribution to global growth
100
%
Contribution to global growth
Percenta...
Massive, rapid urbanization
Change in urbanized population
500
600
Millions of peopleChange in urbanized population
300
40...
Global Forces:Global Forces:
Elevated Commodity PricesElevated Commodity Prices
8
Non-agriculture commodity prices up10-fold since WWII
Real commodity prices in the post-war period
1600600
Real commodity ...
Commodity prices remain elevated
IndexBank of Canada commodity price index (rebased to January 2009 = 100)
180
200
Bank of...
Large gap between Canadian and global oil prices
0
10
US$/BarrelDaily data
30
-20
-10
-50
-40
-30
May-2008 May-2009 May-20...
Global Forces:Global Forces:
The Great DeleveragingThe Great Deleveraging
12
Sharp increase in debt across developed world
Percentage pointsChanges in household, corporate and net government debt
200...
U.S. non-financial debt near levels of Great Depression
U S non financial debt to GDP ratio
300
%
U.S. non-financial debt-...
Weakest U.S. recovery since Great Depression
IndexU.S. Real GDP across economic cycles
135
145
U.S. Real GDP across econom...
Weakest U.S. recovery since Great Depression
IndexU.S. Real GDP across economic cycles
135
145
U.S. Real GDP across econom...
Weakest U.S. recovery since Great Depression
IndexU.S. Real GDP across economic cycles
135
145
U.S. Real GDP across econom...
Rebuilding U.S. wealth will take a long time
RatioHousehold net worth to disposable income US$
6.1
6.3
6.5
RatioHousehold ...
Rebuilding U.S. wealth will take a long time
RatioHousehold net worth to disposable income US$
6.1
6.3
6.5
RatioHousehold ...
Euro-area recovery was weak, is over
Euro area real GDP across economic cycles
115
IndexEuro area real GDP across economic...
European tensions still elevated
%Yields on 10-year sovereign bonds, daily data
7
8
%Yields on 10 year sovereign bonds, da...
A balance of payments problem
IndexUnit labour cost annual data 2000=100
140
150
IndexUnit labour cost, annual data, 2000=...
Private deleveraging, public leveraging
Percentage point
Household and government debt
30
40
g p
change, 2007 to 2011
Hous...
Private deleveraging, public leveraging
Percentage point
Household and government debt
30
40
g p
change, 2007 to 2011
Hous...
Consequences for CanadaConsequences for Canada
25
Canada: First G-7 country to recover to pre-recession GDP
IndexReal GDP; 2007Q1 = 100, quarterly data
104
106
Real GDP; 20...
Canada has more than recovered all jobs lost
IndexTotal employment; index: 2007Q1 = 100, quarterly data
104
106
IndexTotal...
Weakest post-war export recovery
IndexComparison of real exports across economic cycles; quarter
160
170
IndexComparison o...
Canada’s export performance second worst in G-20
% h i h f ld t 2000 t 2010
Japan
France
Canada
U.K.
% change in share of ...
Canadian firms are losing competitiveness
%Contribution of various factors to the change in Canada's relative unit labour ...
Canada’s trade directed toward slow growing economies
Average growth rates 2000 2010 annual data
10
12
%Average growth rat...
Canada has relied on domestic demand
Evolution of real private domestic demand since pre-recession peak
110
Index
Evolutio...
Borrowing costs remain at exceptionally low levels
%Weekly data
6.5
7.0
%Weekly data
5.0
5.5
6.0
3.5
4.0
4.5
2008 2009 201...
Share of household expenditures in GDP now high
RatioQuarterly data
0.66
0.68
Quarterly data
0.62
0.64
0.58
0.60
1975 1980...
Canadians now more indebted thanAmericans and British
RatioAggregate debt-to-income ratio
1.6
1.7
1.8
Aggregate debt to in...
The Current OutlookThe Current Outlook
36
Projection for economic growth (per cent)
2002-2007
average
2011 2012 2013 2014
United States 2.6 1.7 2.3 2.5 3.6
Euro are...
Private domestic demand to continue driving growth
Percentage pointsContributions to real GDP growth
4
6
Percentage points...
Some slack remains in labour market
Monthly data, 3-month moving average
309
%%
Monthly data, 3 month moving average
26
28...
Robust business investment to continue
Comparison of real business fixed investment across economic cycles;
115
120
Index
...
Business more optimistic about future sales
Balance of opinion*: Over the next 12 months, is your firm's sales volume expe...
Total and core inflation in Canada expected to be around 2 %
%Year-over-year percentage change, quarterly data
3
4
%Year o...
What Must Be DoneWhat Must Be Done
43
Global
Maintain open trade and capital markets
Implement financial reforms
Fiscal sustainability limits stimulus optionsFi...
Europe
Implement:
– Bank recapitalization - more new capital fewer asset salesBank recapitalization more new capital, fewe...
Canada
Maintain price stability through flexible inflation targeting
Keep financial markets liq id and operatingKeep finan...
47
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Election may 14 2013 marl carney economic outlook b of canada apr 27 2012

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Election May 14 2013 Marl CarneyEconomic Outlook B of Canada Apr 27 2012

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Election may 14 2013 marl carney economic outlook b of canada apr 27 2012

  1. 1. E i O tl kEconomic Outlook OttawaChamberofCommerce/OttawaBusinessJournal:Mayor’sBreakfastSeries Ottawa,Ontario 27April2012 MarkCarneyMarkCarney Governor
  2. 2. Agenda Three global forces The consequences for Canada The current outlook What must be done?at ust be do e 2
  3. 3. Global Forces:Global Forces: The Rise of Emerging Market EconomiesThe Rise of Emerging-Market Economies 3
  4. 4. Very robust growth in emerging markets Real GDP, Index 2007Q1=100, quarterly data 150 160 150 160 Index Index Real GDP, Index 2007Q1 100, quarterly data 130 140 130 140 110 120 110 120 90 100 2007 2008 2009 2010 2011 90 100 4 China Emerging market and developing economies Last observation: 2011Q4 Note: Emerging market and developing economies is calculated using annual growth rate from IMF 2012 April WEO. Source: Statistics Canada, Bureau of Economic Analysis, China National Bureau of Statistics, IMF 2012 April WEO, Bank of Canada.
  5. 5. Very robust growth in emerging markets Real GDP, Index 2007Q1=100, quarterly data 150 160 150 160 Index Index Real GDP, Index 2007Q1 100, quarterly data 130 140 130 140 110 120 110 120 90 100 2007 2008 2009 2010 2011 90 100 5 U.S. Canada China Emerging market and developing economies Last observation: 2011Q4 Note: Emerging market and developing economies is calculated using annual growth rate from IMF 2012 April WEO. Source: Statistics Canada, Bureau of Economic Analysis, China National Bureau of Statistics, IMF 2012 April WEO, Bank of Canada.
  6. 6. Emerging markets now account for bulk of growth Contribution to global growth 100 % Contribution to global growth Percentage contributions to global real GDP growth, annual data 60 80 20 40 2000 2011 0 20 6 Advanced economies Emerging and developing economies Last observation: 2011Source: International Monetary Fund World Economic Outlook, Bank of Canada calculations
  7. 7. Massive, rapid urbanization Change in urbanized population 500 600 Millions of peopleChange in urbanized population 300 400 100 200 0 100 1970 - 1990 1990 - 2010 2010 - 2030 f 7 More developed regions India & China Note: f denotes forecast Source: United Nations - World Urbanization Prospects
  8. 8. Global Forces:Global Forces: Elevated Commodity PricesElevated Commodity Prices 8
  9. 9. Non-agriculture commodity prices up10-fold since WWII Real commodity prices in the post-war period 1600600 Real commodity prices in the post war period 1946 = 100 IndexIndex Average industrial metals and energy 800 1000 1200 1400 400 500 Average industrial metals and energy prices (2002-2011, right axis) Average industrial metals and energy prices (1971-2001, right axis) 200 400 600 800 200 300 prices (1971 2001, right axis) -200 0 200 0 100 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 9 Industrial Metals (left axis) Agriculture (left axis) Energy (right axis) Last observation: 2011Source: Bank of Canada, U.S. Bureau of Labor Statistics
  10. 10. Commodity prices remain elevated IndexBank of Canada commodity price index (rebased to January 2009 = 100) 180 200 Bank of Canada commodity price index (rebased to January 2009 100) 140 160 120 2009 2010 2011 2012 80 100 10 All commodities (US$) Non-energy commodities (US$) Energy commodities (US$) Last observation: April 2012Note: April 2012 figures are calculated based on the average of daily spot prices up to 20 April 2012. Source: Bank of Canada
  11. 11. Large gap between Canadian and global oil prices 0 10 US$/BarrelDaily data 30 -20 -10 -50 -40 -30 May-2008 May-2009 May-2010 May-2011 -60 Western Canadian Select minus West Texas Intermediate 11 West Texas Intermediate minus Brent Western Canadian Select minus Brent Last observation: April 2012 Note: Values in April 2012 are estimates based on the average daily spot prices up to 13 April 2012. For Brent crude oil prices, front-month futures prices are used. Sources: Bank of Canada and Bloomberg
  12. 12. Global Forces:Global Forces: The Great DeleveragingThe Great Deleveraging 12
  13. 13. Sharp increase in debt across developed world Percentage pointsChanges in household, corporate and net government debt 200 250 g pChanges in household, corporate and net government debt as percentages of nominal GDP from 1980 to 2010 150 200 100 Canada Germany Australia United France United Japan Greece Spain Italy Portugal 0 50 13 Canada Germany Australia United States France United Kingdom Japan Greece Spain Italy Portugal Note: Some figures refer to change from 1980 to 2009. Source: Cecchetti, Mohanty and Zampolli (2011)
  14. 14. U.S. non-financial debt near levels of Great Depression U S non financial debt to GDP ratio 300 % U.S. non-financial debt-to-GDP ratio Percent of GDP 250 200 100 150 14 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Last observation: 2011Q4Source: U.S. Census Bureau data from 1916 to 1953, U.S. Flow of Funds data from 1954 to 2011, Bureau of Economic Analysis
  15. 15. Weakest U.S. recovery since Great Depression IndexU.S. Real GDP across economic cycles 135 145 U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession 105 115 125 85 95 Years after the start f th i Years before the t t f th i -2 -1 0 1 2 3 4 5 6 7 65 75 of the recessionstart of the recession 15 Range of past recession (1948 onward) U.S. current cycle Base-case projection Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections
  16. 16. Weakest U.S. recovery since Great Depression IndexU.S. Real GDP across economic cycles 135 145 U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession 105 115 125 85 95 Years after the start f th i Years before the t t f th i -2 -1 0 1 2 3 4 5 6 7 65 75 R f t i (1948 d) Th Bi Fi d fi i l i of the recessionstart of the recession 16 Range of past recession (1948 onward) The Big Five modern financial crises U.S. current cycle Base-case projection Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections
  17. 17. Weakest U.S. recovery since Great Depression IndexU.S. Real GDP across economic cycles 135 145 U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession 105 115 125 85 95 Years after the start f th i Years before the t t f th i -2 -1 0 1 2 3 4 5 6 7 65 75 Range of past recession (1948 onward) The Big Five modern financial crises of the recessionstart of the recession 17 Range of past recession (1948 onward) The Big Five modern financial crises U.S. current cycle Great Depression Base-case projection Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections
  18. 18. Rebuilding U.S. wealth will take a long time RatioHousehold net worth to disposable income US$ 6.1 6.3 6.5 RatioHousehold net worth to disposable income 8000 9000 US$ billions 5.5 5.7 5.9 5000 6000 7000 4.9 5.1 5.3 2000 3000 4000 1990 1993 1996 1999 2002 2005 2008 2011 4.5 4.7 0 1000 W lth l t i 2007 k 18 20-year average Sources: U.S. Bureau of Economic Analysis, Federal Reserve Board and Bank of Canada calculations Last observation: 2011Q4 Wealth lost since 2007 peak Level of savings in 2011
  19. 19. Rebuilding U.S. wealth will take a long time RatioHousehold net worth to disposable income US$ 6.1 6.3 6.5 RatioHousehold net worth to disposable income 8000 9000 US$ billions 5.5 5.7 5.9 5000 6000 7000 4.9 5.1 5.3 2000 3000 4000 1990 1993 1996 1999 2002 2005 2008 2011 4.5 4.7 0 1000 W lth l t i 2007 k 19 20-year average Sources: U.S. Bureau of Economic Analysis, Federal Reserve Board and Bank of Canada calculations Last observation: 2011Q4 Wealth lost since 2007 peak Level of savings in 2011
  20. 20. Euro-area recovery was weak, is over Euro area real GDP across economic cycles 115 IndexEuro area real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession 105 110 95 100 -2 -1 0 1 2 3 4 5 6 90 Years after the start of the recession Years before the start of the recession 20 Range of past recessions (1980 onward) The Big Five modern financial crises Current cycle Base-case projection Note: The Big Five modern financial crises include Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: Eurostat and Organisation for Economic Co-Operation and Development
  21. 21. European tensions still elevated %Yields on 10-year sovereign bonds, daily data 7 8 %Yields on 10 year sovereign bonds, daily data 4 5 6 2 3 4 2009 2010 2011 2012 0 1 21 Germany France Italy Spain Last observation: 25 April 2012Source: Bloomberg
  22. 22. A balance of payments problem IndexUnit labour cost annual data 2000=100 140 150 IndexUnit labour cost, annual data, 2000=100 120 130 100 110 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 90 Germany France Portugal Ireland Italy Spain 22 Germany France Portugal Ireland Italy Spain Last observation: 2011 Sources: Deutsche Bundesbank, Institut national de la statistique et des études économiques, Instituto Nacional de Estatistica, Central Statistics Office, Istituto Nazionale di Statistica and Instituto Nacional de Estadistica
  23. 23. Private deleveraging, public leveraging Percentage point Household and government debt 30 40 g p change, 2007 to 2011 Household and government debt 10 20 -20 -10 0 Spain United Kingdom United States -30 Debt/disposable income General government gross debt (% GDP)Debt/disposable income General government gross debt (% GDP) Note: Figures for debt/disposable income refer to percentage point change from peak to trough. Latest available data for household debt is 2011 Q3 for Spain, 2011Q4 for others. 2011 forecast figures are used for government debt. Source: Bank for International Settlements, International Monetary Fund Fiscal Monitor April 2012, national statistics agencies
  24. 24. Private deleveraging, public leveraging Percentage point Household and government debt 30 40 g p change, 2007 to 2011 Household and government debt 10 20 -20 -10 0 Spain United Kingdom United States -30 Debt/disposable income General government gross debt (% GDP)Debt/disposable income General government gross debt (% GDP) Note: Figures for debt/disposable income refer to percentage point change from peak to trough. Latest available data for household debt is 2011 Q3 for Spain, 2011Q4 for others. 2011 forecast figures are used for government debt. Source: Bank for International Settlements, International Monetary Fund Fiscal Monitor April 2012, national statistics agencies
  25. 25. Consequences for CanadaConsequences for Canada 25
  26. 26. Canada: First G-7 country to recover to pre-recession GDP IndexReal GDP; 2007Q1 = 100, quarterly data 104 106 Real GDP; 2007Q1 100, quarterly data 98 100 102 94 96 2007 2008 2009 2010 2011 90 92 26 Canada United States Euro area Japan Last observation: 2011Q4Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, and Japan Statistics Bureau
  27. 27. Canada has more than recovered all jobs lost IndexTotal employment; index: 2007Q1 = 100, quarterly data 104 106 IndexTotal employment; index: 2007Q1 100, quarterly data 100 102 94 96 98 2007 2008 2009 2010 2011 2012 92 94 27 Canada United States Euro area Japan Last observations: 2011Q4 and 2012Q1 Note: Employment data for Japan in 2012Q1 is the average of January and February data. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, and Japan Statistics Bureau
  28. 28. Weakest post-war export recovery IndexComparison of real exports across economic cycles; quarter 160 170 IndexComparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data Quarterly peak in GDP before the downturn 130 140 150 Years after the d t Years before th d t 100 110 120 downturnthe downturn -1 0 1 2 3 4 5 6 80 90 28 Range of previous cycles (since 1951) Average of previous cycles (since 1951) Current cycle Base-case scenario Sources: Statistics Canada and Bank of Canada calculations and projections
  29. 29. Canada’s export performance second worst in G-20 % h i h f ld t 2000 t 2010 Japan France Canada U.K. % change in share of world exports, 2000 to 2010 Indonesia Germany Italy Mexico U.S. Japan Australia Saudi Arabia Korea Argentina South Africa Indonesia China India Turkey Russia Brazil Australia 29 -50 0 50 100 150 200 China Source: International Monetary Fund %
  30. 30. Canadian firms are losing competitiveness %Contribution of various factors to the change in Canada's relative unit labour costs 35 40 45 %Contribution of various factors to the change in Canada s relative unit labour costs vis-à-vis those in the United States, quarterly data 20 25 30 35 0 5 10 15 2005 2006 2007 2008 2009 2010 2011 -5 0 Canadian dollar vis-à-vis the U.S. dollar Relative wages 30 Relative wages Relative productivity Percentage change in relative unit labour costs vis-à-vis the United States Last observation: 2011Q4Sources: Statistics Canada, U.S. Bureau of Economic Analysis and Bank of Canada calculations
  31. 31. Canada’s trade directed toward slow growing economies Average growth rates 2000 2010 annual data 10 12 %Average growth rates 2000-2010, annual data 8% of exports 6 8 85% of exports 2 4 0 31 Last observation: 2010Sources: International Monetary Fund World Economic Outlook, Industry Canada, Bank of Canada calculations *This country is not one of Canada's top 15 trading partners. Note: Export shares in 2010 are reported.
  32. 32. Canada has relied on domestic demand Evolution of real private domestic demand since pre-recession peak 110 Index Evolution of real private domestic demand since pre recession peak Index, peak of real GDP =100, quarterly data 100 105 95 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 90 Canada (April MPR) United States Japan United Kingdom Euro area Quarters 32 Canada (April MPR) United States Japan United Kingdom Euro area Last observation: 2012Q3 for Canada, 2011Q4 for all others Note: Private domestic demand includes consumer, business and residential investment, except for the Euro area and United Kingdom, which also includes government investment. Sources: Bank of Canada, Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Cabinet Office, and the U.K. Office for National Statistics via Haver
  33. 33. Borrowing costs remain at exceptionally low levels %Weekly data 6.5 7.0 %Weekly data 5.0 5.5 6.0 3.5 4.0 4.5 2008 2009 2010 2011 2012 2.5 3.0 33 Effective business interest rate Effective household interest rate Last observation: 13 April 2012Source: Bank of Canada calculations
  34. 34. Share of household expenditures in GDP now high RatioQuarterly data 0.66 0.68 Quarterly data 0.62 0.64 0.58 0.60 1975 1980 1985 1990 1995 2000 2005 2010 0.56 0.58 34 Nominal consumption and residential investment to nominal GDP Average from 1975Q1 to present Note: Dotted line indicates a projection. Sources: Statistics Canada and Bank of Canada calculations
  35. 35. Canadians now more indebted thanAmericans and British RatioAggregate debt-to-income ratio 1.6 1.7 1.8 Aggregate debt to income ratio 1.3 1.4 1.5 1.0 1.1 1.2 0.8 0.9 35 Canada United States United Kingdom Last observation: 2011Q4Source: Statistics Canada, U.S. Federal Reserve, U.K. Bureau for National Statistics
  36. 36. The Current OutlookThe Current Outlook 36
  37. 37. Projection for economic growth (per cent) 2002-2007 average 2011 2012 2013 2014 United States 2.6 1.7 2.3 2.5 3.6 Euro area 2.0 1.5 -0.6 0.8 1.4 Japan 1.6 -0.7 1.9 1.6 1.6 China 11.2 9.2 8.1 8.0 8.0 Rest of the world 5.1 4.3 3.4 3.5 3.7 world World 4.4 3.8 3.2 3.4 3.8 Canada 2.7 2.5 2.4 2.4 2.2 a. GDP shares are based on International Monetary Fund (IMF) estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2010. Sources: IMF World Economic Outlook, September 2011, Bank of Canada 37
  38. 38. Private domestic demand to continue driving growth Percentage pointsContributions to real GDP growth 4 6 Percentage pointsContributions to real GDP growth 0 2 4 -2 2009 2010 2011 2012 2013 2014 -6 -4 38 Net exports and government Private domestic demand GDP Sources: Statistics Canada and Bank of Canada calculations and projections
  39. 39. Some slack remains in labour market Monthly data, 3-month moving average 309 %% Monthly data, 3 month moving average 26 28 7 8 22 24 6 7 205 2008 2009 2010 2011 2012 U l t t (l ft l ) I l t t ti k * ( i ht l ) 39 Unemployment rate (left scale) Involuntary part-time workers* (right scale) *Expressed as a percentage of total part-time employment, unadjusted, 12-month moving average Source: Statistics Canada Last observation: March 2012
  40. 40. Robust business investment to continue Comparison of real business fixed investment across economic cycles; 115 120 Index Comparison of real business fixed investment across economic cycles; quarter before the downturn in real GDP = 100, quarterly data Quarterly peak before the downturn in real GDP 100 105 110 85 90 95 Years after the downturn Years before the downturn -1 0 1 2 3 4 5 6 75 80 40 Current cycle 1990-92 cycle 1981-82 cycle Note: Dotted line indicates base-case scenario from April 2012 Report. Sources: Statistics Canada and Bank of Canada calculations and projections
  41. 41. Business more optimistic about future sales Balance of opinion*: Over the next 12 months, is your firm's sales volume expected to increase 50 60 % Balance of opinion : Over the next 12 months, is your firm s sales volume expected to increase at a greater, lesser or the same rate as over the past 12 months? 10 20 30 40 20 -10 0 10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -40 -30 -20 41 Greater: 58% Same:19% Lesser: 23% *Percentage of firms expecting faster growth minus percentage expecting slower growth. Source: Spring 2012 Business Outlook Survey
  42. 42. Total and core inflation in Canada expected to be around 2 % %Year-over-year percentage change, quarterly data 3 4 %Year over year percentage change, quarterly data 1 2 -1 0 2007 2008 2009 2010 2011 2012 2013 2014 -2 42 Control range Total CPI Core CPI* Target Note: Dotted lines indicate projections. *CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining components Sources: Statistics Canada and Bank of Canada calculations and projections
  43. 43. What Must Be DoneWhat Must Be Done 43
  44. 44. Global Maintain open trade and capital markets Implement financial reforms Fiscal sustainability limits stimulus optionsFiscal sustainability limits stimulus options Structural reforms across advanced economies 44
  45. 45. Europe Implement: – Bank recapitalization - more new capital fewer asset salesBank recapitalization more new capital, fewer asset sales – Sizeable sovereign firewall Buy time to re-found European Monetary Union – Fiscal and structural adjustment across the crisis economies – New economic governanceNew economic governance 45
  46. 46. Canada Maintain price stability through flexible inflation targeting Keep financial markets liq id and operatingKeep financial markets liquid and operating Apply lessons ofAmerican and European crisesppy p – Importance of fiscal sustainability – Value of flexible exchange rates – Risks of excessive household debt – Imperative to use cheap foreign capital to maximum effect Canadian businesses to refocus, retool and retrain 46
  47. 47. 47

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