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Canada & Ontario in the Global Economy: Canada & Ontario in the Global Economy: Challenges in a Changing World Challenges in a Changing World Presentation to the Presentation to the Ontario Economic Summit Ontario Economic Summit 14 November 2007 14 November 2007 Paul Jenkins Senior Deputy Governor Bank of Canada

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Page 1: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

Canada & Ontario in the Global Economy: Canada & Ontario in the Global Economy: Challenges in a Changing WorldChallenges in a Changing World

Presentation to the Presentation to the Ontario Economic SummitOntario Economic Summit

14 November 200714 November 2007

Paul JenkinsSenior Deputy GovernorBank of Canada

Page 2: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

v Global economic and financial trends

v Implications for Canada

Ø Canadian economy

Ø Ontario economy

OutlineOutline

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

6

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

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Corporate Bond Spreads(basis points over government yields)

0

50

100

150

200

250

300

350

400

450

500

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

bps

U.S. High Yield EMBI+

Canada Inv. Grade U.S. Inv. Grade

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Global EconomyGlobal Economy

10

10 Year Government Yields

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

%

U.S. Canada Japan

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Global EconomyGlobal Economy

11

3 Month Canadian Money Market Rates

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07

%

T-billsCorporate paperBA (CDOR)Overnight Target

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Global EconomyGlobal Economy

12

Relative YOY Equity Index Performance (%)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07

TSX S&P 500 Euro Stoxx50 Nikkei MSCI Emerging Market *

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Global EconomyGlobal Economy

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Global EconomyGlobal Economy

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Page 15: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

2002 population(million)

80 986040202Percentage of wealthiest nation – GDP per capita

1000

200

600

Source: Bank of Canada calculation & World Bank

Real GDP per capita, PPP 2002(as per cent of Norway)

Global EconomyGlobal EconomyIntegration of China & India

15

Page 16: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

Share of exports

Product sophistication

Canada

China

Source: World Trade Analyzer, World Bank & Bank of Canada calculation

Product Sophistication Comparison I - 1985

Global EconomyCompetition from China

16

Page 17: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

Share of exports

Product sophistication

Canada

China

Source: World Trade Analyzer, World Bank & Bank of Canada calculation

Product Sophistication Comparison I - 2001

Global EconomyEconomyCompetition from China

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Page 18: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

v Issues facing the Canadian economy:

Ø Sharp appreciation and volatility of the Canadian dollar

Ø Magnitude of recent appreciation appears to be stronger than historical experience would have suggested

Ø Weakening of prospects for the U.S. economy

Ø Tightening of credit conditions

Canadian Economic DevelopmentsCanadian Economic Developments

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Page 19: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

Ø The Canadian economy is operating above its production capacity

Ø Momentum in domestic demand has been strong, but net exports have been exerting a significant drag on growth

19

Canadian Economic DevelopmentsCanadian Economic Developments

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Canadian Economic DevelopmentsCanadian Economic Developments

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Canadian Economic DevelopmentsCanadian Economic Developments

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Canadian Economic DevelopmentsCanadian Economic Developments

22

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Canadian Economic DevelopmentsCanadian Economic Developments

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Employment Year-over-year percentage change

-10

-5

0

5

10

2002 2003 2004 2005 2006 2007-10

-5

0

5

10

Manufacturing

Total

Primary & Services

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Canadian Economic DevelopmentsCanadian Economic Developments

24

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Canadian Economic DevelopmentsCanadian Economic Developments

25

Consumer Price Index Year-over-year percentage change

0

1

2

3

4

5

1998 1999 2000 2001 2002 2003 2004 2005 2006 20070

1

2

3

4

5

Core CPI*

Control range

Total CPI

Target

* CPI excluding eight of the most volatile components and the effect of changes in indirect taxeson the remaining components

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Canadian Economic DevelopmentsCanadian Economic Developments

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Goods* and Services** in Core CPI, Excluding the Effect of Changes in Indirect Taxes

Year-over-year percent change

-2

0

2

4

6

2003 2004 2005 2006 2007-2

0

2

4

6

Core Services

Core Goods

Target

* Excluding fruits, vegetables, gasoline, fuel oil, natural gas and tobacco** Excluding mortgage interest costs and intercity transportation

Page 27: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

v With the rapid and significant fall in the value of the U.S. dollar, there is increased risk of disorderly adjustment to global imbalances, including the increased risk of rising protectionist sentiment

v Given the recent, rapid rise of the Canadian dollar, Canada is bearing a disproportionate share of the adjustment

v While domestic demand in Canada remains robust, if recent levels of the Canadian dollar were to persist, the risk is that output and inflation would be significantly lower

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Some Summary Thoughts on Global Some Summary Thoughts on Global Trends and DevelopmentsTrends and Developments

Page 28: Canada & Ontario in the Global Economy: Challenges in a … · 2010. 11. 19. · Canada & Ontario in the Global Economy: Challenges in a Changing World Presentation to the Ontario

v All this points to the heightened need for more exchange rate flexibility on the part of other countries, particularly China and Asia more broadly

v It also points to the need for stronger domestic demand growth outside North America

v The G-20 meetings this week in South Africa offer an excellent opportunity for focused discussion of these issues

v How all of us here today assess and address these global economic forces represents an important challenge for the Canadian and Ontario economies

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Some Summary Thoughts on Global Some Summary Thoughts on Global Trends and DevelopmentsTrends and Developments

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Ontario EconomyOntario Economy

v Issues facing the Ontario economy:

Ø Both cyclical and structural forces at play

Ø Support for market-based adjustments

Ø Importance of taking a medium-term perspective

Ø Policies that encourage flexibility and adaptability

Ø Focus on comparative advantage

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Contribution to Real GDP by Sector (Percent)

0

5

10

15

20

25

97 98 99 00 01 02 03 04 05 06 07

65

66

67

68

69

70

71

72

73

Manufacturing Goods - Excluding Manufacturing Services

Right Scale

Ontario EconomyOntario Economy

30

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Share of Employment by Sector(Percent)

0

5

10

15

20

25

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

62

64

66

68

70

72

74

76

78

Manufacturing Goods - Excluding Manufacturing Services

Right Scale

Ontario EconomyOntario Economy

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