The U.S. economy continued to recover in 2003 as real GDP growth
improved to 3.1%, led by consumer, federal government and
residential spending, as well as, machinery and equipment
investment. Exports rebounded sharply in the second half of the
year helped by a depreciating dollar and an improving world
economy. Concerns over growing government deficits and a large
trade deficit with the rest of the world caused the U.S. dollar
to depreciate sharply against most other major currencies last
year.
Despite the improvement in GDP, employment showed little sign of
recovering, as employers increased output through productivity
gains rather than hiring additional employees. Employment
declined for the second year in a row (down 0.2%) while a
contraction in labour force participation kept the unemployment
rate virtually unchanged near 6.0%.
Real GDP and employment are expected to grow by 4.5% and 1.0%
respectively this year as the U.S. economy enters 2004 with
significant momentum. Tax cuts, low interest rates, productivity
gains, growing profits and a depreciated dollar should boost the
economy again this year. Strong output growth should finally
result in employment growth, albeit weak, as employers begin to
feel confident enough to hire additional workers.
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Real GDP in Canada grew by 1.7% last year. The economy began 2003
on a strong note, but several shocks during the spring and summer
(SARS, BSE, a blackout in Ontario and rapid appreciation of the
dollar) derailed economic growth. GDP and employment growth
quickly slowed, forcing the Bank of Canada to drop short-term
interest rates. The economy began to recover towards the end of
the year as strong U.S. GDP growth resulted in solid export
gains. Employment increased by 2.2% last year, however, similar
growth in the labour force (2.1%) kept the annual unemployment
rate virtually unchanged at 7.6%.
The most significant and long lasting shock to the economy last
year was the rapid appreciation of the dollar and the resulting
negative impact on exporters’ profits. The appreciation of the
dollar reflected higher interest rates (compared to the U.S.),
rising commodity prices and broad-based weakness in the U.S.
dollar. The Canada/U.S. exchange rate rose from 63.5 cents at the
start of 2003 to a peak near 79 cents early in 2004. In some
cases world commodity prices have increased enough to offset the
rise in the dollar, but many Canadian exporters will continue to
struggle in 2004 as they restructure in an effort to restore
profit margins. Some of the upward pressure on the dollar should
be alleviated by interest rate reductions at home and hikes in
U.S. interest rates expected later this year. The Canadian dollar
is expected to average roughly 75 cents U.S. this year.
The Canadian economy is expected to grow by 2.8% in 2004 aided by
a strong U.S. economy, low interest rates, rising commodity
prices and further employment gains. The strength of the Canadian
economy in the near term is once again expected to come from
consumption, business investment, and, to a lesser degree,
exports. Employment growth is not expected to keep pace with GDP
growth as businesses strive to increase productivity. On average,
forecasters expect employment to increase by 1.8%, down from 2.2%
growth in 2003. |
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Massive economic reforms in China since 1978 have created an
economic powerhouse. The purpose of reform was to transform
China’s economy from a state controlled, centrally planned
economy to one that was more market-oriented. It encouraged the
formation of private businesses, liberalized foreign trade and
investment, relaxed state control over prices, promoted
industrial production and invested in the education of the
workforce.
Twenty-five years later, these efforts have succeeded
tremendously. China’s real GDP has grown at an average annual
rate of more than 9% since 1980, replacing Japan as the world’s
second largest economy in 1994. At $6.14 trillion, China’s GDP
now accounts for 12.7% of total world output. The country has
experienced exploding two-way trade as both exports and imports
have grown at an average of 14% per year over the last decade.
As a result, China’s share of world trade has quadrupled over
the last two decades, making it the fourth largest
manufacturing exporter. Factors contributing to the growth
include a strong supply of inexpensive labour, exploding
foreign direct investment, a low-valued fixed exchange rate
policy, and increased access to foreign markets.
With China’s seemingly inexhaustible supply of labour and its
inclusion in the World Trade Organization in 2001, its
integration into the global economy will no doubt continue at a
rapid pace for years to come. China’s integration into the
world economy will inevitably impose adjustment costs on its
trading partners and manufacturers around the world in the
short-to-medium term, but the overall benefits to the world of
an expanding Chinese market will likely outweigh the costs in
the long run. If current growth rates continue China will
surpass the U.S. to become the world’s largest economy in just
over 10 years. |
