World of Information Country Report
Jan 24, 2001
As the largest single trading partner of the USA, Canada reaped considerable benefits from its neighbour's economic boom during 1999, experiencing its second longest period of uninterrupted growth since the second world war. By November 1999, Canadian unemployment had fallen to its lowest since 1961, and inflation also remained low. The real personal disposable income (PDI) of most Canadians rose for two consecutive years in 1998 and 1999. The overall balance of trade improved in 1999, largely due to a growing trade surplus with the USA. However, 1999 was a year in which low global commodity prices continued to depress the extractive and agricultural sectors, and there was concern over the 'brain drain' of mobile professionals to the USA, where earnings were higher and taxes lower.
Discord between the federal government and provincial governments - largely caused by federal government spending cuts in the mid 1990s - eased during 1999. This was helped by the restoration of health spending transfers in the 1999 federal budget.
In November 1999, the Supreme Court issued a unanimous clarification of its September 1999 Marshall ruling on aboriginal fishing rights. It emphasised that the ruling, which allowed some aboriginal peoples to fish without licences, even in the restricted season, applied only to fishing, and not in principle to other agricultural or extractive commodities. The September ruling was the latest in a series of judicial decisions which tentatively extended the rights of aboriginal peoples in land disputes. However, it led to a series of violent clashes between indigenous and non-indigenous fishermen in Atlantic coastal areas in late 1999.
Positive macroeconomic indicators
GDP growth in 1999 was 4.2 per cent in the first quarter, 3.3 per cent in the second quarter and 6.6 per cent in the third quarter - giving 17 consecutive quarters of GDP growth. Overall growth for the year was 4.2 per cent, according to official figures. Unemployment dropped to an 18- year low of 6.9 per cent in November 1999. Inflation increased during 1999, from an annualised figure 0.6 per cent in January to an average of 2.3 per cent for the year as a whole. Although there was a substantial increase in inflation in December 1999, to 2.6 per cent, core inflation (which excludes volatile items such as energy) for that month was 1.6 per cent.
Canada exported goods and services to the value of US$242.71 billion in 1999, up from US$217.24 billion in 1998. Imports rose from US$204.64 billion in 1998 to US$219.89 billion in 1999. The trade balance stood at US$22.8 billion, compared to US$12.6 billion in 1998. This increase was mainly due to a larger trade surplus with the US, increasing to US$41.1 billion in 1999 from US$24.2 billion in 1998. This offset deficits of US$936 million with Japan and almost US$7 billion with the European Union (EU).
The World Economic Forum based in Geneva reported in its July 1999 survey of global competitiveness, that Canada was the fifth most competitive nation (out of 59 surveyed) in the world, following Singapore, the USA, Hong Kong, and Taiwan. There was concern in 1998 that Canadian productivity had fallen significantly behind that of the USA and other industrialised competitors, although this was partly based on an interpretation of outdated official statistics.
During 1999, activity on the Toronto Stock Exchange (TSE) was fuelled by stocks related to information technology, the Internet and telecommunications. The TSE composite index reached a record high of 8,098.19 on 17 December 1999.
Economic growth feeds through
There was evidence during 1999 that the recovery in the Canadian economy led to an increase in the savings ratio, which fell during the mid 1990s to almost zero. Studies indicated that Canadians were saving about five per cent of their income, the highest rate since the 1970s. The improved ratio reflected the increase in personal disposable income (PDI), which was generated to a large extent by the buoyant US and Canadian stock markets.
Other microeconomic indicators were also buoyant during 1999. Consumer spending, sales of existing homes and the construction of new homes were all at record levels. Canada had the second lowest poverty level among the G-7 industrialised countries in 1999, according to a report on labour markets and social conditions published by the International Labour Organisation (ILO) in October 1999.
The 1999-2000 budget provided for increased public spending, most notably on health. He announced a C$3.5 billion expenditure supplement in fiscal year 1998/99 and C$11.5 billion in extra funding over five years from 1999/2000 to 2003/04. Although there was no reduction in income tax rates, Martin announced tax relief measures worth C$7.7 billion over three years, and the complete elimination of a three per cent surtax from 1 July 1999. Following a small budget surplus of C$3 billion for the fiscal year 1997-1998, Martin projected balanced budgets for the three fiscal years commencing 1998-1999.
The federal government suffered a serious defeat when, in October 1999, a federal court dismissed its appeal against the decision of a Human Rights Tribunal. The Tribunal decided in July 1998 that, under the terms of the 1978 Human Rights Act, the government would have to pay as much as C$5 billion (over US$3.4 billion) in wages and interest payments, backdated to 1985, to some 230,000 current and former female federal employees. These employees, in jobs traditionally dominated by women, were paid less than men employed in jobs that were roughly comparable but traditionally dominated by men. The dismissal of the government's appeal, which had been partly based upon criticism of the tribunal's methodology in calculating the wage gap, meant that the federal government was exposed to the largest pay equity award in North American history.
Following its defeat, the government abandoned the possibility of an appeal to the federal Court of Appeals and reached an agreement with trade unions to pay almost C$3.6 billion (almost US$2.5 billion) in retrospective wages and interest payments. The agreement meant that workers would receive cheques averaging C$30,000 (US$20,625), depending upon length of service, within about four months.
The settlement had two major implications for 2000. Firstly, the government's scope for tax cuts in the 2000/01 budget was restricted. Secondly, consumer spending was expected to be given a boost as pay awards of varying sizes filtered through.
The Canadian economy was the third most active, after the US and the UK, in terms of the volume of mergers and acquisitions in 1999.
AT&T Canada Corp announced plans in March 1999 to merge with Metronet Communications Corp in a stock transaction valued at US$2.4 billion. The merger would unite AT&T, a provider of long distance calls, with Metronet, the largest provider of short distance services to Canadian business. The two companies had combined assets of US$3.5 billion and a 7 per cent share of the Canadian telecommunications market in 1998.
British American Tobacco (BAT) announced in August 1999 that it would make a US$7.08 billion bid to buy a 58 per cent share in Imasco Ltd, a Canadian tobacco and property conglomerate. If the acquisition goes ahead, the new entity would control two thirds of cigarette sales in Canada.
In December 1999, the federal government approved Air Canada's bid to take over Canadian Airlines International Ltd, to create the world's tenth largest airline, with 40,000 employees and annual sales of approximately US$6.2 billion. In a deal with the federal Competition Bureau, Air Canada agreed to measures to safeguard competition, including the delay of a discount airline service for Eastern Canada.
Despite hinting that he would like to lead his party to a third successive general election victory, there was speculation that the Liberal Prime Minister Jean Chretien, 66 years old, would come under increasing pressure in 2000 to make way for a younger leader.
Supreme Court rulings in both 1998 and 1999 increased uncertainty over native land rights. This issue is set to grow in significance, with millions of square miles of territory being subject to land rights disputes. Meanwhile, Liberal government legislation regarding the terms of secession from the confederation could ignite renewed controversy in Quebec.
The Liberal government must play an increasingly difficult juggling act with the federal budget. It will come under great pressure in the February 2000 budget to reduce taxes to stop the brain drain of IT professionals to the US. On the other hand, it will also come under pressure from its traditional constituencies to increase expenditure on health and education.
The Canadian economy in 2000 will be sensitive to the performance of the US economy, its largest trading partner. If there is a stock market crash - many observers considered stocks to be overvalued in early 2000 - the Canadian economy would be adversely affected. A significant rise in US interest rates during the year could also put renewed pressure on the Canadian dollar. However, a recovery in Asian economies in 2000 should lead to improving global commodity prices, boosting the extractive sectors of the Canadian economy.
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