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Recent economic and financial developments

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This commentary, which was completed at the end of June, provides an account of economic and financial developments in Canada since the publication of the last Monetary Policy Report in mid-May 1998. International developments since May have increased the degree of uncertainty surrounding the outlook for the Canadian economy. While most indicators of domestic demand as well as the growth of the monetary and credit aggregates suggest continued relative buoyancy in the domestic economy, the foreign trade data bear clear evidence of the drag arising from the situation in Southeast Asia and Japan. However, with the various risks to the outlook appearing to be greater than previously thought, the Bank will continue to monitor developments carefully and constantly reassess its judgment of Canada's economic and financial situation. The core rate of inflation is expected to remain in the lower half of the 1 to 3 per cent inflation-control target range for the remainder of the year. Update 12 August 1998: The degree of uncertainty surrounding the international situation and its implications for the Canadian economy remains high. In Southeast Asia, economic activity continues to decline and financial markets remain nervous. In Japan, the latest economic data point to further weakness. In sharp contrast, the U.S. economy continues to outperform expectations, with domestic demand showing robust growth according to the latest information. As well, recent developments in Europe point to moderate economic expansion. Here in Canada, allowing for the effects of temporary factors such as layoffs associated with the strike at General Motors, the underlying momentum in the economy continues to be positive. The many cross-currents affecting the Canadian economy are evident in the data released since the commentary on recent developments was completed. In the resource sector, production and exports have been weak because of reduced demand from Asia. However, exports of other goods, particularly non-automotive manufacturing goods, have been buoyant, reflecting strong demand from the United States. In Canada, retail sales continue to rise and sales of existing homes are also growing, consistent with the pickup in the growth of household credit. At the same time, new home construction has weakened, in part because of strikes in the Greater Metropolitan Toronto area. Business investment and the growth of total business credit have also remained relatively strong. Recent information on overall investment intentions for 1998 show marked growth, consistent with the latest monthly indicators on investment in machinery and structures, but the resource and non-resource sectors are showing divergent near-term trends. The latest labour force data also point to sustained underlying growth in employment and incomes. On the whole, recent data suggest that real GDP increased by about 2 1/2 per cent (annual rate) in the second quarter, somewhat less than anticipated at the time the commentary was completed. Our current estimate is that the various strikes and other production disruptions (the largest being the spillover effects from the GM strike in the United States) lowered second-quarter real GDP growth by about 1/2 of a percentage point. Thus, in the absence of these disruptions, growth would have been closer to 3 per cent. Economic activity in Canada will continue to be affected by the GM strike and associated layoffs into the third quarter, complicating interpretation of the economic data for this period. This and the uncertainties on the external front underscore the need for continued close monitoring of economic developments. On balance, the positive elements of ongoing strength in consumer and investment spending in Canada, together with the high level of U.S. demand for our products, continue to support economic expansion at rates that will reduce unused capacity. On the inflation front, the latest information points to core inflation remaining in the lower half of the 1 to 3 per cent inflation-control target range. While the effects on the price level from exchange rate depreciation will be working to raise inflation, offsetting factors, such as excess supply in the economy and price competition from Asian producers, will keep overall inflation pressures subdued. Since completion of the commentary, monetary conditions have eased further as a result of the depreciation of the Canadian dollar. As noted in the commentary, the extent of the current international uncertainty is causing volatility in financial markets and fluctuations in monetary conditions over a wide range.

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  • Bank staff, 1998. "Recent economic and financial developments," Bank of Canada Review, Bank of Canada, vol. 1998(Summer), pages 3-27.
  • Handle: RePEc:bca:bcarev:v:1998:y:1998:i:summer98:p:3-27
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