HOW THE CRISIS AFFECTED NORTH AMERICA

The North American economy depends heavily on what happens in the United States. Canada and Mexico were negatively impacted by the decline in U.S. imports and rising unemployment but both countries had sound macroeconomic fundamentals. No Canadian financial firm failed and Canadian banks were rated as the world's soundest. In the United States, in contrast, the adjustments required in private and public saving and the consequent impact on real economic activity were widespread and large. The extent and timing of necessary financial regulatory reforms also contribute to considerable uncertainty about the path of a sustained recovery. The analysis that follows considers alternative scenarios and discusses five policy changes that would contribute to a sustainable outcome.

Sound macroeconomic positions in Canada and Mexico not only gave governments room to take aggressive recovery measures but each government also used the stimulus programmes to bring about structural changes to promote long-term growth. Both invested in physical infrastructure programmes and Canada expanded investments to upgrade its stock of human capital as part of the development of its knowledgebased economy. Although in 2009 Mexico suffered the largest contraction in real GDP among the emerging market economies (Table 5.1) both countries are expected to weather the recession successfully and to return to sustainable growth paths in 2010. This is apparent in the projected reductions in their structural fiscal deficits; the IMF expects that while Canada's fiscal deficit of –3.4 per cent of GDP in 2008 will extend into 2009 the underlying structural balance will be small (–0.9 and –0.8 per cent of GDP in 2009 and 2010, respectively). Mexico's fiscal balance was –1.4 and –0.3 per cent of GDP in 2008 and 2009, respectively, and will return to –0.4 per cent of GDP in 2010. It is also apparent in inflation projections; Canada's CPI inflation is expected to remain below 2 per cent while Mexico's is expected to remain in line with recent levels.