Sunday, August 2, 2009

When Will the Economy Be Stable Again?

This is the question on the lips of many economists and regular citizens alike. According to the Bank of Canada, the economy is in an upswing. However, complete recovery, or a return to economic levels prior to the recession, should not be expected until mid-2011.

Although economic indicators are showing upward trends, restructuring in major industries such as auto and forestry – to name but two of many – will take some time, thus slowing economic activity. Another key factor is the increasing strength of the Canadian dollar. The return of a strong dollar – currently trading at nearly 91 cents U.S. - will hold back exports. Mark Carney, governor of the Bank of Canada, has warned that the dollar's raid rise may "fully offset positive factors" in the economy. However, economists seem certain that Mr. Carney is unlikely to intervene with the dollar's growth, thus maintaining the policy of the Bank of Canada for nearly a decade.

A strong Canadian dollar is not all bad, though, for the economy. While it increases the price of Canadian exports, conversely it decreases the price of imports. As the demand for imports is quite high, the strength of the Canadian dollar is beneficial to consumers.

Another indicator of recovery on the horizon is the decision by the Bank of Canada to reduce the amount of cash that it was injecting into the banking system. This measure was adopted when credit markets seized up in the final quarter of 2008. The banks have reduced their dependence on this cash influx, thus generating the central bank's decision. However, the Bank of Canada will maintain its commitment to provide liquidity as necessary to support the stability of the nation's financial system.

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