OECD Economic Surveys : Canada 1979.

71 Pages·4.326 MB·English

by  OECD

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION OE COOPERATION ET DE D t V E L 0 P P E M E N T ECONOMIQUES
BASIC STATISTICS OF CANADA
THE LAND
Area (thousand sq. km.) 9976 Population of major cities,
Agricultural area (9c of the total including their metropolitan
area) 1977 6.4 areas (1976 census):
Montreal 2802485
Toronto 2803 101
THE PEOPLE
Population (1.1.1979) 23597600 Civilian labour force (1978) 10882000
Number of inhabitants Employment in agriculture
per sq. km. (1978) 473000
Population, annual net natural Immigration (annual average
increase (average 1974-1978) 189400 1974-1978) 148400
Natural increase rate per Average annual increase
1 000 inhabitants in civilian labour force
(average 1974-1978) 8.3 (1974-1978, %) 2.9
PRODUCTION
GNP in 1978 (millions Origin of gross domestic product
of Canadian dollars) 231 835 (1977, % of total):
GNP per head (Canadian dollars) 9824 Agriculture, forestry and fishing 3.7
Gross fixed investment (private Manufacturing 18.4
and public) per head Mining and quarrying 3.7
(Canadian dollars) 2217 Construction 6.4
Gross fixed investment (private Public administration 7.2
and public) as 'To of GNP 22.6 Other 60.6
THE GOVERNMENT
Government current expenditure on Composition of Parliament
goods and services (average (Number of scats):
1974-1978, % of GNP) 20.2 House
Government gross fixed capital of Senate
formation (average 1974-1978, Commons
Çc of GNP) 3.5
Federal Government current revenue Libcr.nls 114 72
(average 1974-1978, % of GNP) 17.8 Progressive
Federal direct and guaranteed Conservatives 136 19
debt r/c of current expenditure Social Credit 6 1
(average 1974-1978. 7c) 118.6 New Democratic 26
Independent
Liberal (cid:9): 1
Independents (cid:9) 2
Vacant (cid:9) 9
Last election: 22.5.1979
FOREIGN TRADE
Exports: Imports:
Exports ofgoods and services as % Imports ofgoods and services as %
of GNP (average 1974-1978) 25.3 of GNP (average 1974-1978) 27.6
Main exports, 1978 Main imports, 1978
(% of commodityexports): (ÇJ> of commodity imports):
Wheat 3.6 Industrial materials 20.2
Newsprint 5.5 Motor vehicles and parts 27.9
Lumber 6.1 Producers' equipment 21.1
Woodpulp 4.1 Consumer goods 18.4
Non-ferrous metals and alloys 4.8 Main suppliers, 1978
Motor vehicles and parts 23.8 (% of commodity imports):
Other manufactured goods 16.8 United States 70.5
Main customers, 1978 United Kingdom 3.2
(% of commodityexports): Other EEC 6.1
United States 70.3
United Kingdom 3.8
Other EEC 5.5
THE CURRENCY
Monetary unit: Canadian dollar Currency unit per US S,
average of daily figures:
Year 1978 1.1406
May 1979 1.1553
Note An international comparison of certain basic statistics is given in an annex table.
OECD ECONOMIC SURVEYS
H iVtS - \
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CANADA
JUNE 1979
ORGANISATION FOR BCONOMIC COOPERATION AND DEVELOPMENT
The Organisation for Economic Co-operation and Development
(OECD) was set up under a Convention signed in Paris on 14th
December 1960, which provides that the OECD shall promote policies
designed:
to achieve the highest sustainableeconomicgrowth andemploy¬
ment and a rising standard ofliving in Member countries, while
maintainingfinancialstability, andthustocontributetothedeve¬
lopment ofthe world economy;
tocontributeto soundeconomicexpansion inMemberaswellas
non-member countries in the process ofeconomic development;
to contribute to the expansion ofworld trade on a multilateral,
non-discriminatory basis in accordance with international
obligations.
The Members ofOECD are Australia, Austria, Belgium, Canada,
Denmark, Finland, France, the Federal Republic ofGermany, Greece,
Iceland, Ireland, Italy,Japan, Luxembourg, the Netherlands, NewZea¬
land, Norway,Portugal,Spain,Sweden,Switzerland,Turkey, theUnited
Kingdom and the United States.
TheSocialistFederal RepublicofYugoslaviais associated in certain
work oftheOECD, particularlythatoftheEconomicand Development
Review Committee.
TheannualreviewofCanada
by the OECD Economic andDevelopmentReview Committee
tookplace on 6thJune 1979.
This Survey has not been updated since.
©OECD, 1979
Queries concerningpermissionsortranslationrightsshouldbeaddressed
to:
Director of Information, OECD
2, rue André-Pascal, 75775 PARIS CEDEX 16. France.
CONTENTS
Introduction 5
I General economic developments in 1978 5
Demand, output and employment 6
Prices and incomes 14
The balance of payments 19
II Economic policy 26
Fiscal policy 27
Monetary policy 32
Wage and price controls 35
Industrial policies 37
III Prospects and conclusions 42
Developments in early 1979 and short-term outlook 42
Conclusions 47
Annex: Chronology of main economic policy events 53
Statistical annex 58
TABLES
Text
1 Demand and output 6
2 Current economic indicators 8
3 Employment trends 13
4 Balance of payments :
a) Medium-term trends 20
b) Recent trends 21
5 Merchandise trade volumes and values 23
6 Competitive position of Canadian manufacturing industry 23
7 Public revenue and expenditure 28
8 Demand impact of public sector transactions 31
9 Price and compensation guidelines and outcome 36
10 Business enterprise and labour market support schemes 38
11 Selected indicators of" exposed" manufacturing industries 40
12 Importance of" sensitive" industries by province 41
13 Short-term prospects 44
OECD Economic Surveys
Statistical annex
A Gross national product and expenditure 58
B Industrial production, employment and other business indicators 60
C Prices, wages and finance 62
D Balance of payments 64
DIAGRAMS
1 Capacity utilisationratesinmanufacturing 9
2 Unemployment and participation rates 10
3 Productivity and unit labour costs 12
4 Consumer price index 14
5 Wage settlements under major collective agreements Canada
and United States 16
6 Cost and price developments in Canada and abroad 17
7 Selected corporate operating ratios 18
8 Canadian dollar exchange rate 25
9 Government finances 29
10 Relative interest rate developments 33
11 Money supply 34
INTRODUCTION
As aresult ofthe stabilisationpoliciespursued inCanadaoverthelastfewyears,
substantial results have been achieved in correcting the major economic imbalances
which had developed. The rise in costs has been brought under better control which,
coupled with a large downward adjustment of the exchange rate, has resulted in a
marked improvementinthe country's international competitiveposition. This, inturn,
has ledto asignificantincreaseinthevolumeofnetexports;however,duetothedeter¬
ioration in the terms oftrade and rapidly rising net payments on investment income,
the current account of the balance of payments has remained in large deficit Asa
result of the appreciable slowdown in the growth of money incomes the underlying
rate of inflation has decelerated, but owing to exogenous factors, particularly food
prices, the risein consumerprices has remained persistently high. The adjustment has
entailed slower growth of activity at below potential and a rise in unemployment to
historically high levels, but in contrast with developments in most other Member
countries, employment has continued to expand rapidly.
In spiteofatighteningofpolicystance,theoutlook forthenexttwelvemonthsor
so points to some acceleration in the growth of domestic demand, led notably by a
significant recovery in private non-residential fixed investment linked to the present
high rateofcapacity utilisation inmanufacturing, risingprofitability and amorebuoy¬
ant assessment ofmarket prospects. Owing to a weaker contribution from theforeign
balance, reflecting both a deceleration ofexport market growth and faster expansion
ofimports, the rate ofgrowth ofreal GNP is expected to be around V/i per cent. In
these circumstances ofbelow-capacity growth, unemployment is likely to remain at a
high level. Although there are no clear signs so far of a wage bubble following the
phasing-out of direct controls, there is a risk that the rapid rise in consumer prices
could lead to higher wage claims and an acceleration ofthe underlying rate ofinfla¬
tion.
Developments in 1978 covering both domestic trends and the balance of
payments are examined in thefirstpartofthepresentSurvey. PartII dealswith policy
orientation, including a brief consideration of industrial policy problems. Part III
reviews trends in early 1979 and assesses the country's economic prospects over the
next twelve monthsor so; it also concludes theSurveywith adiscussion ofsomemain
policy issues.
I GENERAL ECONOMIC DEVELOPMENTS IN 1978
The growth ofoutput last year, while falling short ofofficiai expectations, was
broadly in line with that ofthe OECD area. As in 1977, final domestic demand rose
by only 2 per cent in volume, but stockbuilding and continued strong export
performance helped push theGDP growth rate up to 3Vi per cent; however, this rate
was below the growth ofcapacity which is estimated at around 4-4Y2 per cent Thus,
OECD Economic Surveys
apart from the brief recovery during 1976, the gap between the rates of growth of
actual and potential output has been widening almost continuously since the 1973/74
boom. Employment increased by 3.4 per cent, but since this went handin hand with a
marked rise in participation rates, unemployment continued to edge upwardsuntil late
in the year. The counterpart ofthis favourable employment development was a very
poor productivity performance, with output per man failing to rise at all. In part this
may have been due to labour/capital substitution as the growth of wage rates
decelerated further with real wages actually falling in 1978.
With a 9 per cent year-on-year increase in consumer prices, the rate ofinflation
in 1978 remained clearly abovethetarget setundertheAnti-InflationProgramme. Ex¬
ports of manufactures rose substantially and local producers regained domestic
market shares, butthe current accountdeficitwidened further to US$4'/2 billion as, in
contrast to the OECD area as a whole, Canada experienced a furtherterms-of-trade
loss last year, and the deficit on net invisibles continued to rise. In turn, the rising cur¬
rent deficit coupled with a tendency for autonomous capital inflows to fall exerted
downward pressure on the exchange rate.
Demand, output and employment
The rise in private consumption, although somewhat faster than in 1977, was
much weaker than in earlieryears, reflecting arelatively low(3.4 per cent) increase in
real disposable income and a small rise in the savings ratio. The rise in savings was
probably related to increased uncertainty stemming from fluctuations inthe exchange
rate and higher unemployment. Substantial increases in farm and investment incomes
(up 40 and 16 per cent in nominal terms, respectively) as well as higher interest rates
may also have contributed to the rise in the savings ratio.
Table 1 Demand and output
Volume percentage change
1977 1978
S19B7i8ll. 1975 1976 1977 1978 I 11 I 11
Seasonally adjusted1
Private consumption 136.0 5.4 6.4 2.8 3.1 2.1 1.4 4.2 2.7
Government consumption 47.7 3.9 1.9 20 1.5 6.6 -2.0 4.4 -0.3
Gross fixed investment 52.3 3.8 2.2 0.3 -0.2 4.0 -1.5 -2.1 5.0
Public 7.6 4.3 -6.5 2.6 1.5 8.5 6.2 -0.1 0.1
Private 44.7 3.7 3.8 -0.1 -05 3.3 -2.7 -2.5 5.9
Residential 13.2 -7.3 17.5 -4.6 -4.8 -5.8 -6.2 -4.4 -4.3
Non-residential construction 14.5 13.4 -5.2 3.4 2.1 13.9 6.6 2.8 3.4
Machinery and equipment 17.0 3.5 3.4 0.3 0.2 1.9 -7.5 -5.5 21.6
Final domestic demand 236.0 4.8 4.7 2.1 2.1 3.3 0.2 2.9 2.6
Stockbuilding2 1.2 -2.6 1.1 -0.8 0.5 -1.2 0.3 0.0 1.6
Total domestic demand 237.2 2.1 .5.7 1.3 2.6 2.1 0.5 2.9 4.2
Exports of goods and services 61.9 -6.3 9.4 7.4 8.5 10.6 0.8 12.4 8.8
Imports of goods and services 67.2 -2.8 8.0 2.5 4.1 5.6 -4.2 3.9 13.5
Foreign balance2 -5.3 -0.7 -0.1 1.0 0.9 0.8 1.3 1.7 -1.4
Error of estimate2 -0.1 -0.2 -0.3 0.3 -02 0.6 0.6 -0.9 0.3
GNP 231.8 1.3 5.5 2.7 3.4 3.7 2.5 3.9 3.2
1 Annual rale of change over preceding hilf-year.
2 Percentage point contribution to GNP growth rate.
Source: StatisticsCanada, National Income md Expenditure Accouruv.
Canada
There were sizeable increases in consumer outlays on durable and semi-durable
goods but expenditure on services expanded only moderately and purchases ofnon¬
durableitems decelerated in real terms duetothe marked acceleration in food prices1.
The trend during the year, particularly in spending on durable goods, was irregular
probably reflecting relative price changes largely due to fiscal policy measures2.
Following marked increases in the second and third quarters, expenditure on durables
fell in real terms inthefinal quarter;thedeclinewas particularly marked forpurchases
of new automobiles.
Private non-residential businessfixed investment increased by only 1 per cent in
volume last year, even less than in 1977. This outcome, somewhat weaker than the
figure suggested by thePrivate andPublicInvestment intentions survey carried outby
Statistics Canada at mid-year3, may to some extent have been affected by strikes in
the building industry during the summer, although there was little sign ofany subse¬
quent rebound in activity. Outlays on machinery and equipment, a good one-halfof
which on average is imported, rose very rapidly in the second half, with deliveries of
specialequipment (aircraft and computers)having an important influence. In linewith
the pattern typical of the last few years, energy-related capital formation, which is
relatively little affected by cyclical considerations, continued to expand appreciably
albeit at a slower pace than in 1977 (5 per centinstead of7 cent), increasing its share
oftotal expenditure to some 28 per cent Non-energy-related outlays declined for the
third successive year.
Gross fixed capital formation in agriculture, transportation and certain private
services revived, but manufacturing volume investment fell quite sharply. A shift in
relative factor costs in 1978 as a result oflower wage increases on the one hand and
an acceleration in machinery/equipment prices on the other4 may well have led to
labour substitution where such scope exists. But, more generally, the weakness of
manufacturing investment in spite ofthe significant recovery ofcorporate profits and
the rapid increase in capacity utilisation to rates above medium-term average would
seem to havebeen relatedto therelatively sluggish growth ofdomesticdemand andto
uncertainties attached to the future course of the exchange rate and prospects of a
slowing down in the US economy. On the other hand, the various policy measures
taken to stimulate expenditure over the past coupleofyears (for example, investment
tax credits to promoteregional development and research spending) may not yet have
had their full effect
For the second yearrunningthevolumeofhousing construction fell last year by
4'/2-5 per cent and had it not been for a sharp acceleration in starts during late
1 Anoverallindicationofthesensitivityofexpenditurepatternstopricemovementsisprovidedby
comparing alternativeestimatesofvolumeoutlaysby usingfixedandmoving-weightdeflators. Applying
thefirst-mentioned deflator would reduce the volumeestimateto only 2.2 per cent last year, compared
with the 3.1 per cent figure shown in Table 1 which is derived from a moving-weights deflator.
2 Householddisposableincomewasboostedbyabout'/j percentagepointbyatemporayincrease
last yearin theminimum sizeofpersonal incometax credit This stimulus wasconcentrated tothefirst
two months ofthe year. Provincial sales tax rates weretemporarily reduced, mainly between April and
September,whileinOctobertherateoffederalmanufacturers'salestaxwascut. Thelast-mentionedmea¬
sure was not, however, expected to have an impact on consumer prices before the beginning of 1979.
Alberta,whichdoesnotlevyasalestax,accountsfornotquite 10percentoftotalprivateconsumption.
3 A shortfall is not uncommon. Between 1957 and 1977 the preliminary outcome (which,
however, is typically subjectto subsequent upward revision) has on averagebeen Vh percentagepoints
below the mid-year survey figure (in nominal terms). The survey is also conducted at the beginning of
each year, but these results tend to underestimate actual outlays.
4 Prices ofinvestmentgoods, which areto a largeextent imported, wereparticularly affected by
the depreciation oftheCanadian dollar. In 1978 thenational accountsimplicit pricedeflator forexpen¬
diture on machinery and equipment rose by 11.1 per cent compared with6.7 percent fortheGNP im¬
plicit deflator.
OECD Economic Surveys
1977/early 1978 in anticipation of the expiration of certain fiscal concessions5 the
decline would probably have been greater. Apart from an overhang of unsold
dwellings, which was no doubt the main depressive factor6, the sharp acceleration in
the rise ofconstruction prices (from 7.7 per cent in 1977 to 11 per cent last year) and
the rise in mortgage interest rates (from 10.3 per cent at mid-yearto 11.5 per centby
December 1978) as well as the moderate income growth and the maintenance ofrent
controls by the Provinces have probably dampened demand. The decline in housing
starts was much more pronounced for multiple dwelling starts than for single units.
Additions toinventory holdings duringthefirst halfof 1978 remainedvery slight
(as had been the case during the preceding six months), but accounted for 50 per cent
ofthe overall GNP growth in the second half. The increase, which was concentrated
to the fourth quarter, appears to have beeninfluencedbyfiscal considerations7 and by
the accumulation ofimported stocks ofmachinery and equipment Withthe declinein
private consumption there may also have been some involuntary stockbuilding. To
some extent the build-up may also have reflected the need to replenish manufacturing
raw and semi-finished materials stocks in view ofthe revival in output However, the
ratio of stocks to sales offinished goods in manufacturing fell quite sharply during
1978 to a level well below itslong-termtrendvalue8,probablyreflectingtheincreasing
buoyancy of demand.
While there was a marginal acceleration in the volume growth ofprivate expen¬
diture lastyear (from 2.1 to 2.3 percent),publicsectorfinalexpenditureexperienced a
Table 2 Current economic indicators
Percentage change from previous period, seasonally adjusted, actual rates
1978 1979 1979
Ql Q2 Q3 Q4 Ql Jan. Feb. March April
Real domestic product 0.9 0.8 1.0 1.1 1.0 0.1 0.5 0.5
Industrial production 1.3 1.2 1.8 2.7 2.1 0.5 0.6 0.3
Retail sales (volume)1 0.8 0.8 1.0 -0.9 1.3 -0.6 1.3 2.0
Housing starts 19.2 --32.9 8.5 1.3 -4.7 28.5 -25.8 11.8 -4.6
Employment 1.0 1.0 1.1 0.7 1.4 0.9 0.0 0.4 0.0
Unemployment rate3 8.4 8.5 8.4 8.2 7.9 8.1 7.9 7.9 7.9
Consumer prices3 2.0 2.3 2.4 1.7 2.4 0.8 0.9 0.9 0.9
Commodity
exports (volume)' 4.1 2.2 0.8 5.8 1.7 0.0 -6.0 7.0
Commodity
imports (volume)* -2.0 9.9 -1.2 7.2 1.5 -3.2 -3.8 12.0
1 Value of retail sales deflated by goods component of consumer price index (seasonal adjustment by
OECD Secretariat).
2 Number of unemployed as per cent of labour force,
3 Seasonal adjustment by OECD Secretariat.
4 Customs basis.
Sources: Statistics Canada, Daily and Canadian Statistical Review; Bank of Canada, Review; Secretariat
estimates.
5 Thisreferstoa capitalcosttax allowanceformultipleurban residentialbuildings(MURBs). In
theevent,theallowancewasextended,butthiscategoryofstartsfellonaverageby 16percentlastyear.
TheAssisted HomeOwnershipPlan (AHOP)wasterminatedinMaylastyearand wasreplaced bythe
Graduated Payment Mortgage (GPM) plan.
6 This reached a peak of some 28 thousand units at mid-year.
7 An inventory tax deduction of3 percent was introduced in theFederal budgetof31stMarch
1977 which provides some incentive to increase stockholding in thefinal quarter ofthe year. A strong
build-up occurred in the fourth quarter of 1977 as well.
8 On a seasonally-adjusted basistheratio fell from0.68 inthefourthquarterof1977 to0.58 in
the fourth quarter of 1978, compared with a long-term trend value of0.64 at the end oflast year.