Policy and economic analysis program

Policy and economic analysis program - Policy and Economic...

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Policy and Economic Analysis Program ROTMAN SCHOOL OF MANAGEMENT / UNIVERSITY OF TORONTO Tel: (416) 978-4182 140 St. George St., Suite 325, Toronto, Canada M5S 3G6 Fax: (416) 971-2071 PEAP Memo 2009-7 September 9, 2009 Subject: Canadian Outlook: Recovery Underway – No V, But No Double-Dip Fortunately for the Canadian economy, our most recent forecasts for 2009Q2 turned out to be on the pessimistic side. In mid July of this year (PEAP Memo 2009-6) we had projected a decline in GDP of 1.7% quarter over quarter, while the estimate released on August 31 shows a decline of “only” 0.9%. Our primary error was on the consumption side, where the economy turned in a positive growth rate of 0.4% and we had projected a decline of 0.2%. Partly this is due to the savings rate staying stable from the first to the second quarter, where we had projected a slight increase, but most importantly we mis-forecasted real personal disposable income, which actually increased in the second quarter. The primary reason for this was a greater-than-expected drop in personal tax revenues at both the federal and provincial levels. Time will shed more light on the source of this tax shortfall, but it was clearly beyond what would have been expected from reduced labour income. The most likely culprit is reduced taxation of capital gains and other investment income following on the financial disaster in the second half of 2008 and rapidly declining interest rates. Our second major error was for residential construction; we had projected a significant decline based on very poor housing starts for the second quarter, but the category appears to have been rescued by stronger resale activity and vigorous home renovation. These items are the handiwork of expansionary monetary policy and creative fiscal policy. The other components of GDP were largely in line with our forecast: Exports and imports both fell, with a much larger drop in exports cutting into growth. Non-residential and Machinery & Equipment investment both fell somewhat more than we forecasted. Finally, we were gratified to see another large reduction in business inventories. Even this reduction was not sufficient to reduce the inventory to sales ratio, but it should set in train a series of further inventory reductions that will bring this ratio gradually back to a reasonable value. Both of our forecasting errors for the second quarter do however cast something of a shadow on subsequent quarters. Unless tax revenues take another significant fall in the second half of 2009, we expect real disposable income growth will be virtually nonexistent. While we forecast a slight decrease in the personal savings rate over the second half of this year, the net result is consumption growth only barely above zero. Residential construction should continue its positive levels for the rest of 2009 and the first half of 2010 as the
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This note was uploaded on 03/03/2011 for the course RSM 100 taught by Professor Oesch during the Spring '08 term at University of Toronto- Toronto.

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Policy and economic analysis program - Policy and Economic...

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