Economic Trends
In terms of output and growth, Canada’s real GDP was 2.96% higher than it was a year ago, but the growth trend is slowing down from a growth rate high of 3.81% in Q3 2010. Japan’s economy has contracted in Q2 2011 by 0.76%. It’s rate has been volatile, growing rapidly over the past year only to contract again. The UK’s growth rate is 1.63%, and that country has had fairly stable, if sluggish, real GDP growth. The current GDP growth rate in the United States is 2.33%. Real GDP growth is on a downward trend in the U.S. But has maintained healthy levels since Q4 2009.
All four countries were affected by the recession. Each experienced real GDP declines during the 2008-2009 period. Japan was the hardest hit. Yet each nation recovered in 2010, only to see the rate of economic growth slow again in 2011.
Canada showed weakness during the recession years of 2008 and 2009 with respect to output per worker. The productivity rate has improved since the beginning of 2010 but in this calendar year has begun to decline again, in step with the country’s GDP growth declines. Japan’s labor productivity (output per worker) has been as volatile as its GDP growth. The country suffered a very steep decline in productivity during the 2008-2009 period, but had very high productivity growth in 2010. The pace of productivity growth has slowed significantly in 2011 in Japan. In the United Kingdom, output per worker dropped sharply in 2009 only to rebound in 2010. It is currently declining again. In the United States, output per worker declined in 2008-2009, albeit less than in the UK and Japan. Productivity increased in 2010 but the rate of productivity growth has slowed in 2011.
Labour productivity slumped during the recession in all four countries. As was the case with real GDP growth, productivity dropped the most in Japan. That country’s alarming decline in productivity was in part offset by improvements in productivity in 2010. Each country, however, saw improvement in 2010 only to see the rate of productivity improvement decline in 2011.
3. Canada has not reported in 2011 Q2 CPI figure yet, but the country has seen an escalation in inflation over the course of the past four quarters. From flatlining inflation in 2009 Q2 and deflation in 2009 Q3, Canada’s inflation rate is back around the Bank of Canada’s target range (BoC, 2011). Japan has suffered from deflation since the outset of the economic crisis. The current CPI growth rate of 0% and last quarter’s rate of 0.1% are improvements over the deflation that has occurred in the years previous, although these rates are very low. In the United Kingdom, the CPI growth rate is high at 4.11%. It has been over 3% since Q1 2010. This rate is likely more inflationary than Britain would prefer. CPI growth in the U.S. is 3.33%, and this represents an increase over the relatively low rates recorded since the country exited deflation in Q4 2009. The Fed measures its upper limit on the target inflation range based on core CPI, not headline, but even that has exceeded the Fed’s upper target limit (Tella, 2011).
Three of these four countries struggle with inflation issues. Japan is having trouble getting any inflationary traction, while the U.S. And UK have seen larger than expected spikes in the headline CPI rates. Only Canada has been able to maintain a stable inflation rate in its central bank’s target range over the course of the study period.
4. Since unemployment in Canada rose to 8.5% in Q3 2008, it has been falling and now sits at 7.77%. In Japan, the unemployment rate has remained relatively low and today’s rate of 4.7% is the lowest since Q1 2009. The United Kingdom’s unemployment rate has been relatively stable over the study period but remains persistently high at 7.67%. The unemployment rate in the United States rose rapidly with the recession, from 5.3% to 9.97%, a much larger change than the other three countries experienced. The rate has not fallen much and still sits at 8.9%. The unemployment figures illustrate that despite Japan’s volatility in some areas, employment is fairly stable. The UK and Canada did not suffer from the recession nearly as much as the U.S. did, at least as far as jobs are concerned.
5. The country that is the strongest at this time is Canada. There are a number of reasons for that assessment. The country had, in general, the least amount of volatility over the course of the recession and (quasi) recovery. The recession had an impact, but that impact was muted in comparison to the massive job losses in the United States. The performance of the UK was reasonable, but the country now faces inflationary pressures. Canada has declining unemployment and no inflation pressure. The United States is dogged by persistent unemployment and minor inflationary risk. The quantitative evidence shows that Japan is in the worse position of the three. Japan faced high volatility in its economy during the recession and the country continues to experience a lack of real GDP growth and the risk of deflation. Qualitatively, Canada also has the strongest banking system of these countries, with no bailouts having been required. Canada’s resource-based economy is also better positioned to benefit from the strong economic growth in Asia, compared with the reliance on consumer consumption by the other three countries.
6. According to the yield curve chart provided by the U.S. Department of the Treasury, the current yield curve is slightly distorted from the norm (Investopedia, 2011; Treasury, 2011). The normal relationship is that as the maturity increases, the yield will increase as well. The normal distribution holds that the long maturities will see a flattening of the yield curve at the long end (30 years). In the current yield curve, this flattening does not occur. The rates continue to increase with the term and while the rate of increase slows slightly at the end, the flattening does not materialize.
Estrella and Trubin (2006) point out that the slope of the yield curve is often viewed as a predictor of future economic activity. A common predictor of recessions is yield curve inversion, where short-term rates rise above long-term rates. This is not the case with the current yield curve. The flattening of the yield curve is attributed to expectations of a short-term rise in interest rates, typically induced by monetary policy. The lack of flattening in the current yield curve indicates that there is no investor expectation of a rate increase in the foreseeable future. Inflation might be creeping upwards, but an increase in rates appears to be out of the cards on the basis of sluggish GDP growth and persistent high unemployment.
Works Cited:
BoC. (2011). Inflation control target. Bank of Canada. Retrieved October 20, 2011 from http://www.bankofcanada.ca/monetary-policy-introduction/framework/inflation-control-target/
Estrella, A. & Trubin, M. (2006). The yield curve as a leading indicator: Some practical issues. Federal Reserve Bank of New York. Retrieved October 20, 2011 from http://www.newyorkfed.org/research/current_issues/ci12-5/ci12-5.html
Investopedia. (2011). Yield curve. Investopedia. Retrieved October 20, 2011 from http://www.investopedia.com/terms/y/yieldcurve.asp#axzz1VCSWJAY8
St. Louis Fed. (2011). International economic trends: August 2011. Federal Reserve Bank of St. Louis. Retrieved October 20, 2011 from http://research.stlouisfed.org/publications/iet/
Tella, A. (2011). We’ve overshot the Fed’s upper inflation limit. Real Clear Markets. Retrieved October 20, 2011 from http://www.realclearmarkets.com/articles/2011/09/19/weve_overshot_the_feds_upper_inflation_limit_99263.html
US Treasury. (2011). Resource center: Treasury curve yield. U.S. Department of the Treasury. Retrieved October 20, 2011 from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
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