OPINION: A close look at metrics reveals weakness in Canadian economy

October 18, 2019
Jock Finlayson

With the federal election on the doorstep, now is a good time to look at where Canada stands in overall prosperity and assess how the pronouncements being made by the party leaders stand up against the economic challenges facing the country.

Since 2010, Canada has cranked out modest economic growth, with a temporary dip in 2014-15 when global commodity prices cratered. Real wage growth has been muted, running around 0.6% per annum over the last five years despite steady job creation and a falling unemployment rate. Meanwhile, inflation has stayed well anchored around the Bank of Canada’s 2% target. Overall, Canada’s performance on these core macroeconomic metrics has been solid.

But a deeper look at the data leads to a less cheery conclusion.

Most of the growth in real gross domestic product (GDP) reflects Canada’s rapidly expanding population, driven by historically high and still rising levels of immigration. This demographic growth has fuelled steady increases in “labour input” – basically, more total hours worked, and more people employed, year after year. It has also led to higher demand for housing and other locally provided goods and services in the handful of Canadian metropolitan communities where a large majority of new immigrants settle.

A growing workforce generates additional economic output and income. This certainly isn’t a bad outcome – after all, we all want the economy to provide job opportunities for those wishing to work. But more people working and producing more output doesn’t by itself add up to greater collective prosperity. That only happens when real GDP is increasing on a per-person basis. And here the story is sobering.

Federal government ministers and some media pundits like to describe Canada’s economy as “strong.” However, living standards, as measured by GDP per capita, have exhibited only feeble gains over the past several years. In fact, as our colleague David Williams documents in a new Business Council of British Columbia paper, since 2007 Canada has seen the biggest decline in relative living standards – an almost six percentage point fall in GDP per person vis-a-vis the United States – among the G7 countries, Australia and New Zealand. As Williams notes, this is mainly explained by the fact that other countries are increasing productivity at a faster rate than Canada. Many other developed economies – not just the U.S. – have done a better job of becoming more efficient, scaling domestic companies, and quickly adopting digital and other advanced process technologies that add value and lower costs.

Canada is also losing ground in some other key areas. Our ranking in surveys of global competitiveness has been slipping. We are increasingly seen as a jurisdiction burdened with particularly costly, cumbersome and outdated regulatory regimes across several domains of government activity. Interprovincial barriers to trade and labour mobility continue to make it harder for some companies to grow and some workers to ply their trade in other parts of the country.

Finally, and perhaps most worryingly, the Canadian business sector is weakly capitalized. Investment in machinery, equipment, structures, engineering infrastructure and intellectual property products is low compared with the U.S. and other top-tier jurisdictions. According to the latest estimates from the C.D. Howe Institute, this year Canadian companies collectively will invest about $15,000 per employee in various forms of tangible capital plus intellectual property. The average figure for the advanced economies as a group is $21,000, while in the U.S. it is roughly $26,000. Stated differently, for every new investment dollar helping a typical advanced-economy worker be productive, a Canadian worker will receive only $0.71. The contrast with the U.S. is even starker. For every new capital dollar enjoyed by American workers, their Canadian counterparts will have to get by with just $0.58. No wonder Canada is widely viewed as having a productivity problem.

The election campaign has featured lots of talk about making life more affordable for the never-defined “middle class,” hiking government spending and tweaking tax policy. But the parties have been mostly silent on the fundamental challenges around productivity, investment attraction, building global-scale Canadian companies and fostering innovation.

If the members of Parliament who assemble in Ottawa after October 21 want to improve living standards for the broad population, they will need a policy agenda aimed at making Canada a high-productivity, high-income economy and an innovation leader rather than a persistent laggard. Regrettably, such an agenda is nowhere in sight based on the promises being made in this dispiriting election campaign. •

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.

As published in Business in Vancouver.

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