Canada’s economy has been on a roll this year after dodging the bullet of recession in 2001. The GDP grew an annualized 4.3 per cent in the second quarter, more than three times as fast as the US economy, and only modestly down from the cracking 6.2 per cent growth rate in the first quarter of this year. While the US job creation has faltered, Canada’s economy generated 427,000 new jobs in the first nine months of the year, the majority of them full-time, in the best-sustained employment performance since 1987. The country is likely to lead growth among the Group of Seven industrialized countries both this year and next, according to the International Monetary fund’s latest world economy forecast.
Despite the gathering international economic and political storm clouds, Canada’s economy has been underpinned by strong consumer confidence and a booming housing market. With a lower proportion of their wealth invested in the stock market than their US counterparts, Canadian consumers have also suffered less from the negative wealth effect of the market collapse. Domestic demand has proved so strong that the Bank of Canada, which last year cut interest rates to a four-decade low of 2 per cent, has this year tightened monetary policy in three quarter-point steps in an effort to head off inflationary pressures.
Further rate rises will be required to keep inflation within target in the medium term. But with recovery showing signs of faltering in the US, Canada’s biggest trading partner, can the good times be sustained for much longer? About 85 per cent of Canada’s exports go to the US. Manufacturing jobs in particular are highly dependent on the US market. If the US stumbles back into a double-dip recession, Canada will inevitably suffer.
However, many local economists appear confident that the US will eventually pull through and deep Canadian growth on track, albeit at a slower pace than before. Canada’s strong growth - and a widening interest rate differential with the US - have done little to help the Canadian dollar, which has declined inexorably against the US dollar during the past decade. After a modest bout of strength in the summer, buoyed by firmer commodity prices, the Canadian currency has since fallen back again.
Brazil has solidified its financial system and modernized much of its infrastructure, partly through a successful privatization of the telecommunications network. Attracted by the new found financial stability, foreign direct investment has poured into the country. Indeed, Brazil has been second only to china as a preferred emerging market destination for direct investors, attracting an annual average of $21 billion between 1996 and 2000. Productivity rates in agriculture and many industries have increased to internationally competitive levels.
Brazil’s steel industry is one of the most efficient in the world. Living standards have also improved. The defeat of inflation paved the way for a big expansion in the consumption of basic goods like chicken and milk, as well as consumer durables. The number of fixed lines has more than tripled since 1994 and Brazil has seen explosive growth in sales of mobile phones. Indicators of health and education show some improvement too. Basic education now reaches 97 percent of children, up from 90 percent a decade ago, and Brazilians are living longer than ten years ago. There has been an improvement in most social indicators. Domestic savings remain at 17 per cent of the GDP.
Brazil has made only limited progress in tackling its current account and fiscal deficits that have been at the root of many of its problems. Exports have increased by 37 per cent in volume terms in the last five years, partly because of the increased competitiveness afforded by the devaluation of the Real in January 1999. But in dollar terms the rise has been offset by a fall in commodity prices. And although the current account deficit has shrunk, that is partly because of the fall in imports.
Inward flows of foreign direct investment covered three-quarters of the deficit last year but there are worries that the expected fall-off this year may leave the government needing to borrow more money on international markets. The government has recently improved its record in managing public finances, producing primary surpluses of 3 per cent of the GDP or higher in the last three years. However, this has only been achieved by a substantial increase in the tax burden.
Since 1994 the tax burden has risen from 26 per cent to 34 per cent of the GDP and little progress has been made in rationalizing an inefficient system of indirect taxation.
Recent months have brought mixed fortunes for Bermuda, a 22sq mile island in the Atlantic with a population of just 64,000 and no significant exports. The hotel industry, in slow decline for a decade, slumped sharply following the September 11 terrorist attacks in the US — traditionally the source of 80 per cent of Bermuda’s tourist trade. Visitor numbers last year were down by more than one-fifth on 2000.
By contrast, the international business sector has had a good year. Growth has been driven by the influx of an estimated $12 billion of capital into the insurance industry and the formation of more than 100 new insurers. This expansion has brought jobs. It has also helped boost the number of business visitors, mitigating the impact of the collapse in the tourist trade. Despite such a robust performance, the overall economy remains weak. The finance ministry forecasts the real GDP growth in 2002 will be flat, following a contraction of 2 per cent last year. In 2000, the GDP increased 2.9 per cent.
Weak growth in Bermuda has been compounded by higher inflation, driven principally by rising world oil prices since mid-1999. Consumer prices rose 2.9 per cent in 2001, up from 2.7 per cent in 2000. In the 2002-03 budget, published in February, finance minister, said employment opportunities last year declined in several sectors, including manufacturing, utilities, retail and hospitality.