February 20, 2006	Monday	Muharram 21, 1427

Canada

THE Canadian economy ended 2005 on a mixed note, with some of November’s strength appeared to moderate and December saw job losses and a decline in the trade surplus. Yet, it remains sound, with the central bank’s fourth quarter estimate of real GDP growth (+2.5 per cent). The Bank of Canada is now confident that the pace of expansion will return above the 3 per cent mark in the first quarter of 2006.

Labour market conditions remain favourable despite the 2,100 job losses in December — mostly part-time jobs. Full time positions, a better gauge of underlying strength, increased by 36,000. Manufacturing remained the weakest job creating sector, losing more jobs. The rate of unemployment crept up to 6.5 per cent from November’s record low. October retail sales grew a robust 0.6 per cent m-o-m, largely on the strength of auto sales Housing ended 2005 on a strong, but moderating note

Canada’s trade surplus slipped to CAD 6.9bn in November, down from CAD 7.6bn in October. Nominal exports fell 2.0 per cent to CAD 39.7bn — the first decline in nine months, as the price of natural gas softened. Imports remained stable, declining 0.1 per cent to CAD 32.8bn from October’s record. The CPI fell by 0.2 per cent m-o-m in November, as energy prices eased. Core inflation — which excludes the 8 most volatile components of the CPI — was up 0.4 per cent m-o-m. Compared to year ago, the CPI was higher by two per cent, and the core by 1.6 per cent.

The economy is expected to outperform the US economy on a number of fronts in 2006. Rising commodity prices may be approaching a plateau but at high levels that has already spurred a rise in profit margins of firms operating in the energy sector. Monetary policy remains heavily titled towards growth. The labour market has clearly moved into excess demand across the country with the unemployment rate touching a 30-year low in 2005.

Wages are going up, allowing consumption to expand by 2.7 per cent in 2006, down from four per cent in 2005 but above the US growth. International trade is expected be less of a drag in 2006, allowing the real GDP to rise from 2.9 per cent in 2005 to 3.4 per cent in 2006. Some risks remain to the outlook, such as sharply lower oil prices, a more sever residential market slowdown or a failure of the US current account to improve, and these will keep the Bank of Canada vigilant.

Nevertheless, with the economy operating in excess demand territory, the Bank of Canada is bound to raise rates further to prevent consumer price inflation from increasing. The Canadian dollar is expected to lose some ground and trade at 82 US cents by the end of 2006 as oil prices ease and the “petro currency” premium comes off.

New Zealand

Overall economic growth was strong. Official data shows growth of 3.1 per cent in the year to June. Full year data is eventually likely to show growth near 2.5 per cent. This will be a slow-down from 4.4 per cent growth during last year and growth averaging 4 per cent for the past six years. But even this slowing won’t be enough to get the worsening inflation genie back in the bottle. New Zealand is well past the growth rate peak in the current economic cycle. The debate now centres on how much growth will slow and whether even a rapid slowing will be enough to get inflation quickly back below 3 per cent.

However, the growth in New Zealand is expected to slow from the 2.6 per cent recorded in the year to September, to perhaps as low as 1 per cent sometime in the second half of this year. Experts are forecasting a recession.

Annual inflation sits at 3.4 per cent and the experts decline to accept that it will go below 3 per cent until perhaps the start of 2008. The housing market, of course, is ending the year on a very strong note. Sales are running higher than a year ago, prices are at record levels and listings are hard to find.

Construction has, however, been declining since the second half of last year as the biggest supply in dwellings since 1975 hits the market — and will eventually bring a period of falling prices. Another factor which will drive house prices lower but which has yet to kick in is declining net immigration, which now stands near 6000, down from 15,000 last year and 35,000 in 2003.

This flow will probably turn negative as many disgruntled people leave next year. This will occur even though the labour market has tightened further during the year and looks set to worsen for employers. Wages growth is accelerating while the productivity of businesses suffers from low skills of fresh employees. Next year we expect interest rates to remain high with growth slowing further, wages picking up, inflation staying above three per cent, and the currency eventually falling sharply.

For exporters the main challenge quite clearly is the high level of the New Zealand dollar. The dollar (NZD) has been sitting at vastly overvalued levels for more than two years and history suggests this is the length of time usually spend either very high or very low. There remain one or two strong factors underpinning the NZD and it is likely these factors will remain relatively strong into the second half of this year.

Strongest of these factors is the high level of New Zealand interest rates compared with other developed economies. Plus there is the risk the Reserve Bank (RB) may need to increase interest rates again should we receive surprisingly strong economic data in the next few weeks or months. Another supportive factor for the NZD is the fact the RB would not be able to tolerate a sharp currency decline given that, in its recently released forecasts, inflation was forecast to only just fall below 3 per cent in a couple of years and consolidate there.

The rising level of interest rates in New Zealand has helped propel the dollar higher, pushing some parts of the exporting sector into recession. Things are still acceptable in the farming sector, but we are likely to see a flattening of activity in the rural hinterland, which will slowly feed through to the cities and add to the weakness there from non-pastoral exporter suffering. So far weakness in the cities is muted and while growth in retail spending has slowed, it remains firm.

But it depends on many things, such as institutional structures influencing price and wage setting behaviour, and in the current context, the impact which slowing growth has on resource availability. Growth may slow but if reduced demand doesn’t lead to things like rising unemployment and building vacancy rates, reduced road use, and a decent slowing in energy demand, you can still get fairly high inflation.

This is essentially the risk facing the economy. Already the growth rate has slowed to near 2 per cent, with most of the pain in the non-pastoral export sector plus weakness spreading into retailing and house construction. In the June quarter, house building was eight per cent weaker than a year ago.

Switzerland

While Switzerland is still a prosperous country, growth of per capita income has been weak and considerably below the OECD average for a number of years, mainly because of lacklustre productivity gains. In the absence of a significant pick-up in productivity, trend output growth will diminish further due to the ageing of the population, falling to as little as ˝ per cent by 2020. Increasing the potential growth rate of the economy, which is among the lowest in the OECD, is the most important and a well-understood challenge. Even taking account of the revenue generated by investment abroad, and of positive terms-of-trade effects, the standard of living has declined in relative terms when compared with Austria, the United States and the average of the large euro area countries at a rate of between ˝ and one per cent per year over the past 15 years.

The main reasons for sluggish productivity growth are a lack of competition in sheltered sectors, inefficient product market regulations and high costs of services delivered by the public sector or financed by compulsory contributions. Consumers pay a high price for the lack of competition, with a general price level that is some 40 per cent above the EU average.

Since the early 1990s, Switzerland has been confronted with a growing fiscal management problem which stems only in part from sluggish growth: it is primarily rooted in insufficient control over public expenditure which has triggered a sharp rise in taxation, as well as a rise in deficits and debt. The causes for the expansion of the public sector, which has been very pronounced, are many. They include the high income elasticity of demand for numerous public programmes, such as health care or education, whereas there are scant productivity gains in the production of those services.

The inadequate functioning of some product markets and lack of competition has undermined the dynamism of the economy, in particular productivity growth. International comparisons confirm that Switzerland suffers from stringent product market regulation, particularly in the sheltered sectors of the economy; this pushes up prices, which are, on average, among the highest in the world. The authorities are fully aware of the situation and competition policy has moved up the policy agenda.

Switzerland suffers from stringent product market regulation, particularly in the sheltered sectors of the economy; this pushes up prices, which are, on average, among the highest in the world. The authorities are fully aware of the situation and competition policy has moved up the policy agenda. A new cartel law has recently entered into force.