Tuesday, August 26, 2008

Canada’s Economy Doing Better Than GDP Numbers Suggest, Desjardins Economist Says

(CEP News – Geoff Matthews)

Canada’s economy is faring far better than the country’s gross domestic product numbers suggest, says Desjardins senior economist Benoit P. Durocher.

It is difficult to believe that Canada’s economy is currently on the verge of a recession, Durocher wrote in a research note for publication on the Desjardins website.

“Except for certain manufacturing industries, we get the impression that economic activity across the country is in pretty good shape,” he said. “The unemployment rate is hovering close to its historic low, wages are increasing rapidly, and consumer spending and investment are doing rather well despite a recent slowdown.”

The increase in prices for raw materials exported by Canada is boosting income while lower prices for imports, due in part to the loonie’s rise, are cutting expenses, he said. “In short, Canadians get more while paying less.”

Using gross domestic income (GDI) instead of GDP as the benchmark gives a more realistic view of the strength of the Canadian economy, Durocher said.

The real GDI takes into account changes in purchasing power and production, he said, and corrects exports and imports using the same price index.

This alternative benchmark seems to be gaining in popularity, Durocher said, noting that the most recent Monetary Policy Report Update issued by the Bank of Canada signalled that real gross domestic income increased by an annualized rate of 2.4% in the first quarter, owing to a further 8.1% improvement in Canada’s terms of trade.

Canada’s real GDI has grown by 21.4% since early 2003, compared to only 13.8% growth in the real GDP, he said. “In short, the real GDI has presented a much more positive picture of the Canadian economy for some time now.”

Durocher said Canada can’t abandon GDP as an economic measure, given its widespread global acceptance. However, using real GDI “still allows us to assess the health of Canada’s economy under a different angle that can be particularly useful in a context of widely fluctuating terms of trade, as is currently the case in Canada.”

By taking into account the wealth effect associated with sudden movements in trade terms, GDI “provides a more complete overview of the health of our domestic economy,” he added.

Real GDI also paints a much more optimistic portrait of Canada’s economy and collective well-being than the most recent real GDP would lead one to believe, Durocher said. “This observation does not favour additional key interest rate cuts from the Bank of Canada, unless the economic situation deteriorates further.”