Economic Forecast

The 2008–09 financial crisis and resulting global recession caused massive turbulence in the major OECD economies and in the related economic data, making it hard to draw meaningful conclusions from the comparisons during that period. We therefore focus on their projected performance and rankings for 2010 and 2011, in order to provide a more meaningful assessment of the relative performance of these economies as they emerge from the recession.

Canada’s projected report card positions are in the middle of the pack among its peer economies, with a low “B” and 10th place in 2010 and a high “C” and 9th place in 2011. This result would be better than in 2006 and 2007, when Canada ranked 13th, but slightly worse than in the recessionary period of 2008 and 2009. Canada was in 6th place in both 2008 and 2009, with a “B” grade in 2008 and a “C” grade in 2009.

Although Canada drops from 6th place in 2009 to 9th place in 2011, it is not because Canada’s economy is doing worse. In fact, Canada’s actual performance improves on seven of the eight indicators. Income per capita and employment levels are higher in 2011 than in 2009, GDP and employment growth are higher, the unemployment rate is lower, inflation moves into the target zone of 1 to 3 per cent, and performance on inward foreign direct investment (FDI) improves. But Canada’s ranking relative to its peers drops because their economic improvement is even stronger.

Use the bubble diagram below to track several variables over time for Canada and its 16 peer countries. Follow these steps:

1. Under “Color,” choose “Country.” That way, each colour will represent a specific country. (When you scroll over each different coloured bubble, the country name will pop up.)
2. Under “Size,” we recommend you choose “Population levels” or “Income per capita” as the variable to track based on the size of the bubble. That way, you will be able to see at a glance how bigger countries are doing compared with smaller ones, or how richer countries are doing compared with poorer ones.
3. Choose the variable you want to track on the horizontal axis.
4. Choose the variable you want to track on the vertical axis.
5. If you want to see a trail for a particular country, click in the “Trails” box, and then click in the box of the country (or countries) you want to trail. Each country will be represented by a trail of bubbles in its unique colour.
6. Finally, click the play button in the bottom left to begin the show.

Canada’s relative ranking in 2010 and 2011 is projected to be positive on three indicators:

• Employment growth—2nd in 2010 and 3rd in 2011, meriting an “A” grade both years
• Inflation—4th and an “A” both years
• GDP growth—5th both years

Canada’s projected leadership position on employment growth reflects the fact that after laying workers off during the recession, Canadian employers responded quickly and positively to the economic stimulus measures put in place by Canadian governments and started hiring again.

Canada’s job growth may reflect an awareness by employers of the coming tightening in Canadian labour markets as the baby-boom generation prepares to retire in the coming years. Companies may be trying to get ahead of the curve by identifying the talent they need for future growth. The positive result on employment growth may also reflect a faster recovery in consumer and investor confidence in Canada than elsewhere.

Canada continues to be affected by global developments—from globalization itself to risks arising from a heavy European public debt burden—and domestic shortcomings. Canada will rank near the middle of the pack on three indicators:

• Income per capita—9th and a “C” grade in both 2010 and 2011
• Unemployment rate—10th in 2010 and 9th in 2011, resulting in “C” grades
• Inward FDI—6th both years, resulting in a “D” in 2010 and a “C” in 2011

And Canada’s expected performance is at the back of the pack on the final two indicators:

• Labour productivity growth—13th out of 17 both years, yielding a “C” in 2010 and a “D” in 2011
• Outward FDI—16th in 2010 and 11th in 2011, with a “D” grade both years

Canada’s projected weak performance on labour productivity is the flip side of its projected strong employment growth. As the economy recovers, Canadian firms have boosted output by concentrating on growing their workforce rather than focusing on productivity growth. Ideally, Canada should be aspiring to achieve “A” grades on both indicators, since this would indicate an economy that is optimizing wealth creation (through productivity growth) that is widely shared (through employment growth).

The projected “D” grade on outward FDI is also a concern—Canada has been a “D” performer on the outward FDI performance index for much of the past decade. That grade may indicate Canadian businesses are not adapting to the forces of globalization as quickly as their competitors in other major OECD countries. Canadians may not be recognizing the need to develop business strategies using global value chains for critical business inputs and for international sales—even with the advantage of a strong Canadian dollar that makes foreign acquisitions, as well as investments in new businesses, relatively less expensive.

Using our methodology for ranking Economy performance, Australia and Sweden are expected to be the top economic performers. Both Australia and Sweden earn “A” grades in both 2010 and 2011—the only two major OECD countries to do so. Australia was the only major OECD country to avoid the 2008–09 recession, and was one of only two OECD countries to record positive employment growth during the recession. Its deep trade and investment relationship with China and other Southeast Asian economies insulated it to a great degree from the financial meltdown. Australia is expected to remain at or near the top of the rankings for GDP growth, employment growth, inflation, and inward FDI in both 2010 and 2011. (Ironically, the severe floods in early 2011 may have a neutral to positive impact on Australia’s overall economic growth in 2011 and 2012, because the destruction of agricultural and mining output in the near term should be offset by public and private investment in restoration and recovery.)

Sweden is integrated into the European economy and relies heavily on commodity exports. Consequently, it was hit hard by the recession, experiencing a deep contraction in GDP and employment in 2009. However, Sweden has been experiencing an equally sharp recovery, as international and domestic demand for Swedish goods and services rebounded in 2010 and is set to keep rising in 2011—allowing Sweden to join Australia as a leader in employment and GDP growth.

Switzerland, Belgium, and Norway are also expected to be top-five performers in both years, continuing a pattern of economic performance near the top of the rankings that stretches back over the last decade.

Ireland, the U.K., and Italy are projected to be the 15th, 16th, and 17th ranked economies in the 2010 report cards—all earning a “D” grade in the Economy domain. In 2011, the U.K. and Italy are projected to be joined at the back of the pack by France and Japan, all with a “D” grade, while Ireland joins the “B” performers.

There is no single indicator that drives these economies to the bottom of the scorecard. Many of these countries are chronic underperformers on a number of economic indicators. Italy, for example, is last in the group in terms of per capita income, and has experienced slow GDP growth for much of the past decade. Japan has scored last repeatedly in attracting inward FDI and has very weak labour force growth. Ireland and the U.K. were both hit hard by the global financial crisis and recession and saw their rankings decline accordingly. France is a lagging performer on labour productivity growth in the 2010 and 2011 report cards.

Ireland and the Netherlands are the two peer countries that have tumbled the farthest in the Economy rankings since prior to the financial crisis and recession. Ireland falls from 1st place and an “A” in 2007 to 15th place and a “D” in 2010 (improving to 8th and a “B” in 2011), while the Netherlands falls from 3rd and an “A” in 2007 to 13th and a “C” in both 2010 and 2011. Weaker GDP growth, employment growth, labour productivity growth, and outward FDI performance drag down the ranking of the Netherlands.

Despite the severe adjustment pain endured by the Irish economy during the recession, it remains a top performer in terms of inward FDI performance. Ireland is set to be the only country receiving an “A” grade for this indicator in both 2010 and 2011, ranking first and second respectively. Ireland remains an attractive foreign investment destination because it still has a competitive tax regime for investors, a well-educated and available labour force that speaks English (now with lower overall wages), and barrier-free access to the European Union. American and other foreign firms still see Ireland as a gateway to EU markets and a profitable place to invest and operate. Inward FDI attractiveness will help the Irish economy to recover, though the country is unlikely to be called an economic miracle again anytime soon.

The U.S. received remarkably similar Economy grades to Canada prior to the 2008–09 recession, despite a different underlying economic structure and context. Both received “C” grades in 2006 and 2007, and “B” grades in 2008. The financial crisis and rupturing of the property bubble that occurred late in 2008 was much more severe in the U.S. than in Canada, and U.S. fiscal and monetary policy intervention was more aggressive than in Canada. Both economies began to recover about the same time in mid-2009. Yet despite the turmoil, the U.S. is projected to earn the same grades as Canada going forward—a “B” in 2010 and a “C” in 2011.

Why? The most reasonable explanation is that even though the movement in the underlying indicators and the economic conditions for the U.S. and Canada are different, when the composite results are compiled from the eight Economy indicators, the aggregate results turn out to be surprisingly similar. This result points to the need to examine the specific indicators in detail.

The most striking differences between the U.S. and Canada in the Economy report cards for 2010 and 2011 are for employment growth and for income per capita. Although the job markets are different, the loss in GDP due to the recession was comparable for the two countries, and GDP growth is projected to be similar in 2010. This leaves the U.S. far ahead of Canada in income per capita, as it has been for many years. The U.S. is projected to be 2nd (an “A”) on income per capita in both 2010 and 2011, compared with Canada’s 9th place both years.

The American economy is experiencing what some have called a “job-less recovery”—with very weak employment growth. The U.S. is thus ranked 13th in expected employment growth in 2010 (a “C”), compared with Canada’s 2nd-place ranking (an “A”). The job markets are clearly recovering in different ways, with Canada well ahead of expected U.S. performance.

Using the bubble diagram, you can track how labour markets in Canada and the U.S. have performed differently. Follow these steps:

1. Under “Color,” choose “Country.” That way, each colour will represent a specific country. (When you scroll over each different coloured bubble, the country name will pop up.)
2. Under “Size,” choose “Population levels.” That way, you will be able to see at a glance how bigger countries are doing compared with smaller ones.
3. Choose “Income per capita” as the variable for the horizontal axis.
4. Choose “Employment growth” as the variable for the vertical axis.
5. Choose to put a trail on Canada and the U.S. by clicking in the “Trails” box, and then clicking in the boxes of the two countries.
6. Finally, click on the play button in the bottom left to begin the show.

The 2010 and 2011 forecasts for six of the Economy indicators were obtained from the OECD Economic Outlook No. 88 (November 2010). The forecasts for the remaining two indicators—outward and inward FDI—were produced by the Economist Intelligence Unit.

The methodology used to assign grades to the forecast data was the same as that described for the regular report cards in the Methodology section, with one important exception.

Report card grades of A–B–C–D for each indicator are usually calculated by taking the difference between the top and bottom performers and dividing this figure by 4. A country would normally receive a grade of “A” on a given indicator if its score is in the top quartile, a “B” if its score is in the second quartile, a “C” if its score is in the third quartile, and a “D” if its score is in the bottom quartile.

The one exception in the report cards for 2010 and 2011 is the indicator for employment growth in 2010. The normal formula would have assigned a “B” grade to negative employment growth. This did not make sense to us. In those cases, we instead constrained the formula so that countries with negative growth rates receive either a “C” or “D” grade.