Lecture 2: The Canadian Economic Environment PDF

LECTURE 2 THE CANADIAN ECONOMIC ENVIRONMENT Niza Talukder LESSON PLAN  Identify key factors affecting overall economic progress.  Familiarity with the fundamental economic model driving Canada's growth and development.  A foundational grasp of what defines...

LECTURE 2 THE CANADIAN ECONOMIC ENVIRONMENT Niza Talukder LESSON PLAN  Identify key factors affecting overall economic progress.  Familiarity with the fundamental economic model driving Canada's growth and development.  A foundational grasp of what defines economic activity and the processes of economic expansion and contraction.  Identify trends that will influence the future landscape of economic development in Canada.  Insights on how managers utilize information about economic trends to enhance organizational management and tackle competitive challenges in the current market.  Class activity on trend affecting the Canadian market  Class activity on Porter’s Five Forces CANADA AND ITS ECONOMIC SYSTEM  Canada is a member of the G7/8  G7 is an intergovernmental organization comprising seven of the world’s fully developed economies.  US, Japan, Germany, Great Britain, France, Italy and Canada.  These countries collaborate on various global issues such as economic policy, international security, and climate change.  This year’s G7 summit took place in Italy; the next one will be hosted by Canada in Alberta.  The G7 cannot pass laws. However, some of its past decisions have had global effects. CANADA AND ITS ECONOMIC SYSTEM  One of the most fully developed and diversified economic systems in the world  A mixed economy, combining private enterprise with government regulation and intervention. This system allows for both market-driven activities and significant government intervention in sectors like healthcare and education.  Abundant natural resources, skilled labor, and sophisticated technology.  Has moved from being primarily agricultural to a diversified system  Trading relationship with the United States.  In 2019, US accounted for 73% of Canada’s external trade volume and 50% of their import volume. CANADA AND ITS ECONOMIC SYSTEM  Products driving current trade performance include oil and gas, canola, wheat, gold, nickel, potash, sulfur, telecommunications, aerospace, forestry-related, and automotive sector products.  Productivity gains, robust business investments, technological advancements, moderate wage growth, and a favorable exchange rate are deemed to be critical in ensuring that the country remains resilient and competitive now and in the future.  A fundamental requirement for the stability and growth of any economic system is its capacity to support and enhance both present and future economic activities. FACTORS CONTRIBUTING TO ECONOMIC DEVELOPMENT Political stability Established factors of production Manageable Strong levels of national banking debt system Effective Low legal inflation system Sufficient Absence of Comparative levels of corruption advantage investment CONTRIBUTING FACTORS TO ECONOMIC DEVELOPMENT  Political system is stable  Necessary factors of production, such as roads, ports, utility systems, educated workforce, and tech-based business management systems that enable efficient and effective development and delivery of goods and services throughout Canada  National and provincial debt levels are within acceptable limits  Canada’s banking system ranks first in the G7 for the 11th year and it is one of the soundest in the world (2018-2019).  Well-managed inflation levels.  Strong, fair and equitable legal system  Low levels of corruption in both public and private sectors.  FDI  Comparative advantage in the commodities and energy market sector. INFLATION LEVELS Canada's inflation levels are generally well-managed, with the Bank of Canada aiming to keep inflation around its target of 2%. This target helps maintain price stability and fosters economic growth. Canada's recent inflation levels have shown significant variation. As of January 2024, the annual inflation rate fell to 2.9%, the lowest since June of the previous year, driven by decreases in transportation and food prices. However, in May 2024, inflation saw an uptick with higher prices for travel and groceries. The Bank of Canada projects inflation to hover around 3% in the first half of 2024 before easing below 2.5% in the latter half of the year, aiming to return to the 2% target by 2025​ (Bank of Canada) (Statistics Canada) FOREIGN DIRECT INVESTMENT (FDI)  FDI is when a company from one country invests money into a business or project in another country. Canada is a very attractive destination for FDI. Canada attracted USD 52.6 billion in FDI in 2022 (UNCTAD's 2023 World Investment Report). Largest trading partner is the U.S. Canada is viewed as a safe and lucrative place to do business Some of the strengths of the country are the ease of starting a business and getting credit, a well-educated workforce and good infrastructure, abundant and diversified energy and mineral resources, and a strong banking sector. Both Europe and Asia/Oceania are active investors in Canada  CANADA : A MIXED ECONOMIC SYSTEM  In Canada, markets are normally allowed to operate without intervention;  Prices and quantities of goods and services reflect the market equilibrium, where the economically efficient output is realized.  However, Canada does not allow markets to operate without intervention, as evidenced by the existence of competition legislation.  Markets also support, encourage, and promote the concepts of private enterprise, personal ownership, and entrepreneurship.  Finally, government plays a variety of roles in the Canadian economy, ranging from regulator to taxation agent to manager of enterprise.  The government acts through a cooperative/competitive mode, participating in the economy where it feels it is of benefit to the market as a whole. THE UNDERLYING ECONOMIC MODEL The three fundamental principles that influence a mixed economic system are 1. The Law of Supply and Demand 2. Allowance for private ownership, entrepreneurship, and wealth creation 3. Extent of government in influencing economic activity and direction LAW OF SUPPLY AND DEMAND  A fundamental economic principle that shows how the price for which a product or service will be bought and sold is determined in a market, independent of external factors.  Price is dependent on the interaction between demand and supply components of a market.  Demand and supply represent the willingness of consumers and producers to engage in buying and selling.  Elastic and inelastic demand  Market equilibrium occurs when demand and supply intersect to balance each other and create a stable price. MARKET EQUILIBRIUM  Both buyers and sellers are willing to exchange the quantity Q at the price P.  At this point, supply and demand are in balance.  Price determination depends equally on demand and supply.  A market price is not necessarily a fair price, it is merely an outcome. GOVERNMENT INVOLVEMENT IN INFLUENCING ECONOMIC ACTIVITY AND DIRECTION Multiple roles played by the government GOVERNMENT INVOLVEMENT The Canadian government actively participates in the economy, striking a balance between market freedom and state regulation. Government involvement in some of the areas are as follows: Regulation and policy: Canadian government regulates industries to ensure fair competition, environmental protection, labor rights and consumer safety. Public services and welfare: Canada has a robust safety net, with government- provided services like healthcare, public education and welfare programs. Crown corporations: The government owns and operates several key industries through Crown corporations such as Canada Post, CBC and Via Rail. All these are provided to address public welfare. ALLOWANCE FOR PRIVATE OWNERSHIP, ENTREPRENEURSHIP, AND WEALTH CREATION  Private Enterprise includes: – Personal Ownership – Entrepreneurship – Wealth Creation  Developing economies such as China and India are allowing greater access to these capitalistic principles, while others like North Korea, are not. PRIVATE OWNERSHIP, ENTREPRENEURSHIP AND WEALTH CREATION  Canadian economic system allows individuals to create wealth and innovate within a market-driven environment.  Private Ownership: Individuals and businesses have the right to own property, assets, and businesses.  Entrepreneurship: There are various support systems in place for small businesses and startups. Organizations like Futurpreneur Canada and government grants provide resources, mentorship, and funding to aspiring entrepreneurs. The Canada Small Business Financing Program (CSBFP) helps small businesses access loans to grow and innovate.  Wealth Creation: Investment and growth are encouraged through favorable corporate tax rates, capital gains taxation, and tax incentives for innovation and research. THE ECONOMY IN SIMPLE TERMS  The interdependency of the four fundamental factors support the overall economic activity.  Economic Activity = Expenditures + Savings + Investment + Credit  These are the four pillars of economic activity and growth, all interconnected.  For example, increased expenditure can lead to increased savings, while accessible credit can boost spending and investment, creating a positive loop that drives the economic activity. THE ECONOMIC GROWTH CYCLE  The total value of a nation's economy is measured by gross domestic product. In other words, GDP is a measure of economic performance.  Gross Domestic Product (GDP) - market value of all goods and services a nation produces domestically over a year. GDP comprises all the economic activity including: – Goods and services produced and purchased domestically for consumption – Business investments within the economy – Goods produced for export purposes – Government spending Recession – two or more consecutive quarters of decline in GDP ECONOMIC CONTRACTION ECONOMIC EXPANSION KEY ECONOMIC DRIVERS Varies from country to country: – For China, the current key economic driver is government spending – For the US, it is consumer spending; the US is one of the leading purchasers of goods and services. The US economy is $20 Trillion (2018) – the largest in the world 70% of GDP activity in Canada is driven by consumer spending; Other activities that influence Canada’s GDP include natural resources, technology, and energy production. BUSINESS IN ACTION - THE CANADIAN BANKING SYSTEM  The banking system in Canada is known for its stability, soundness, and regulatory rigor.  Banks are among the best-managed and well-capitalized  Well-develop and organized regulatory system (FCAC/OSFI)  Governed by the Bank Act  A strong track record for risk assessment and control, and a stable and secure operational environment  The World Economic Forum annually identifies Canada at the top of the list in terms of safety and soundness (2008-2018) MANAGING THE MOVEMENT IN THE ECONOMY  Economic growth needs to be managed in a way that stimulates investment yet maintains control of inflation and other economic influencers deemed inefficient.  Inflation is the rate of increase in prices over a given period of time.  In other words, inflation measures how much more expensive a set of goods and services has become over a certain period of time.  Growth that is taking place needs to be real growth not one masked by inflation. MANAGING THE MOVEMENT IN THE ECONOMY  Given the geographic distribution of Canada’s economic clusters, regional disparity exists in growth rates and economic potential.  Energy prices impact NFLD and Labrador  B.C., ONT, and QUE should see growth now that NAFTA has been renegotiated (USMCA)  Economic growth in Maritime provinces lags behind other provinces  Trends impacting the Canadian market Inflation Aging workforce, immigration Consumer debt loads Long-term competitiveness Geographic clustering and Small business emphasis Economic imbalance Currency exchange rate impact Globalization and potential geopolitical instability Branch market impact Increased threat of cyber attack Sustainability and green initiatives It is crucial for managers to understand the trends occurring within the economic market. The above trends need to be monitored in order to strategize business operations and delivery of goods and services that will be demanded by the Canadians as a whole. CLASS ACTIVITY – GROUP DISCUSSION Form teams of five students. Conduct a quick online research on trends affecting the Canadian market. Discuss these trends using examples. MANAGING IN CHALLENGING TIMES  What are the general indicators saying about the current economy?  What broad-level changes (political, economic, social, etc.) are occurring which might have an impact on the future growth and market position?  Which competitive actions and market forces may disrupt the way business is done within an organization’s particular market sector? Primary Economic Indicators Unemployment rate Consumer Confidence Index Inflation rate Stock market indexes Consumer Price Index (CPI) Currency exchange rate New housing starts Monthly retail sales Manufacturing inventory Industry-specific indexes CHAPTER SUMMARY Canada and its Mixed Economic System Key Economic Influencers The Economy in Simple Terms – Expenditures, Savings, Capital Investments & Credit The Economic Growth Cycle/Managing Economy Movement – Gross Domestic Product (GDP) – Economic Expansion and Contraction, Inflation, Recession Trends Impacting the Canadian Market IMPORTANT LINKS  https://www.alberta.ca/how-demand-and-supply-determine-market-price  https://www.imf.org/en/Publications/fandd/issues/Series/Back-to- Basics/Inflation