The year 2006 is coming in very much as forecast, as far as the key economic indicators are concerned. Most significantly, the pace of real economic growth for 2006, at 2.7%, will be just a shade below the 2.9% forecast in December 2005. Exports, in particular, were weaker than expected. This was not, however, due to weakness in the U.S. economy since growth there, at 3.3%, was almost as forecast (at 3.4%).

Nominal GDP (NGDP) for 2006, which includes the impacts of inflation, will be very close to Global Insight's forecast of last December. Slightly weaker-than-anticipated, real growth was compensated for by slightly stronger-than-anticipated inflation. Having NDGP on track is important to fiscal policy since NGDP is the "general tax base." Although the forecast for NGDP for 2006 in February's Budget 2006 was too optimistic, that was scaled back to a more realistic level in November's Economic and Fiscal update.

The main surprise of the year had to be oil prices. As they are hard to forecast, it is hard to be surprised at large misses in this forecast. Last December, Global Insight forecast that WTI oil would average $56 over 2006, relative to the $66 actual. In fact, most of the variances of key economic indicators from our original forecast can be traced directly or indirectly to the stronger energy prices.

This unexpected strength in energy prices was very much behind the biggest surprise amongst the major economic indicators: that is, employment growth. Last December we forecast that employment would grow 1.4% in 2006, moving the unemployment rate down to 6.6%. What a pleasant surprise! Employment growth was actually 1.9%, sufficient to drive the unemployment rate down to a thirty-year low of only 6.3%. As evidence of the impact of the unexpectedly strong energy prices, much of the unexpected job creation occurred in Alberta. As well, nationally, more job creation than forecast showed its impacts in housing starts and auto sales, which came in a bit above forecast.

Higher energy prices were the principal reason the Canadian dollar averaged U.S. 88.3 cents a bit above the 86.7 cents forecast last December. Higher gasoline prices did put upside pressure on inflation. Fortunately this impact was overwhelmed by the downward impact of the July 1, 2006 reduction in the GST sales tax. The Conservative's surprised everyone by inserting a cut in the GST into their election platform last January, then surprised many by getting elected. On net, CPI inflation in 2006 was 2.0% relative to the 2.3% forecast last December.

The 175-basis-point tightening cycle of the Bank of Canada, which ended in May 2006, was just slightly more than anticipated, leaving short-term rates averaging 4.0% over 2006, relative to the 3.9% originally forecast. Interestingly, long-term bond yields over 2006 were considerably lower than originally forecast.

A troublesome aspect of 2006's economic performance was that labor productivity did not take a much-needed upward spurt. In fact, with output growth a bit below forecast and employment growth above forecast, productivity performance was a big disappointment. The weaker-than-hoped-for productivity performance can be traced particularly to a disappointing productivity performance in manufacturing.

Looking at the actual performance of the Canadian economy in 2006, as opposed to the performance relative to forecast, Canadians can be thankful. At 2.7%, real economic growth was about at our potential, and long-term average. Unemployment was as low as we can remember. Inflation was right on the Bank of Canada's 2% target. Canada continues to be unique amongst developed countries in having trade and fiscal surpluses and a most manageable public debt burden.

Canada's Economic Performance in 2006

Indicator	Forecast in December 2005	2006 Actual*
Real Economic Growth (%)	2.9	2.7
Employment Growth (%)	1.4	1.9
Unemployment Rate (%)	6.6	6.3
Inflation (CPI) (%)	2.3	2.0
Interest Rates (T-Bills) (%)	3.9	4.0
Canadian $	86.7	88.3
Oil (WTI US$)	56	66
US Economic Growth (%)	3.4	3.3

*Actual or as forecast in late December 2006

by Dale Orr

www.globalinsight.com

www.wmrc.com