In a recent Globe and Mail op-ed (republished here), Jock Finlayson and I argued that Canada’s economic foundations look shaky. Ostensibly, the labour market seems buoyant, yet real wage growth is low and business investment per capita is below pre-recession (2008) levels. The fastest population growth in 28 years is contributing to higher labour supply, employment, hours worked and aggregate GDP, but it’s doing nothing to lift GDP per person. And GDP per person is what really matters for living standards. Let’s explore this further.

Canada's economy is not growing on a per capita basis

Canada’s real GDP per person has not increased in almost two years – since 2017 Q2 (Figure 1). Looking further back, GDP per person has increased by only 5.6% in total since the peak of the last business cycle in early 2008. That works out to an annual growth rate over 11 years of around 0.5%, about half the pace achieved by the U.S. (which was the epicentre of the global financial crisis) and the OECD average for the same period. All of Canada’s net gains were concentrated in two short periods: from 2013 to 2015 and the first half of 2017. For the rest of the time, the economy has either been static or recovering lost ground after negative shocks.

Figure 1

Canada's "lost years" -- long periods with no net gains in GDP per person

Real GDP per person, Canada, 2008 Q1 = 100

Source: Statistics Canada.

Canada's economy is becoming less capital-intensive

Canada’s population policies also seem to be geared to developing a more labour-intensive economy: more workers, but less capital per worker. While labour force and employment growth have lifted both total hours worked and GDP, business investment has lagged. Business investment is a vital contributor to GDP per person, through its impact on capital intensity and productivity. Workers are more productive when they have more and better tools and technologies with which to work.

Business investment in Canada is now lower than at peak of the last business cycle in early 2008, on a per capita basis (Figure 2) and on a per worker basis (Figure 3). Canadian businesses are investing around $700 less per capita and $1,100 less per worker than they were 11 years ago. All major categories of investment – intellectual property products, machinery and equipment, and non-residential structures – are below pre-recession (2008) levels on a per capita basis (Figure 2).

Businesses have become more capital-intensive with respect to computers, transport and communications equipment and engineering structures. However, this has not been enough to offset significant falls in most other types of investment, including software, research and development (R&D), mineral exploration, industrial machinery and non-residential buildings. Note that these figures are for gross investment – they would be even lower if they were net of depreciation.

Figure 2

Most categories of business investment are below pre-recession levels in per capita terms

Real business investment per capita (before depreciation), 2012 chained dollars, Canada
Change from 2008 Q1 to 2019 Q1*

*4 quarter averages
Source: Statistics Canada.

Figure 3

Most categories of business investment are below pre-recession levels in per worker terms

Real business investment per worker (before depreciation), 2012 chained dollars, Canada
Change from 2008 Q1 to 2019 Q1*

*4 quarter averages
Source: Statistics Canada.

Industrial capacity utilization is also below pre-recession levels

With labour supply increasing and real wage growth low, businesses are less likely to feel pressure to invest in modern capital equipment and new technologies – that is, in things that enhance productivity and living standards over time. Furthermore, the economy continues to retain spare or idle physical capacity (Figure 4). The rate of industrial capacity utilization is stuck around its post-2011 average of around 81% (i.e. an average excluding the period immediately after the 2008-09 recession). This is well below Canada’s pre-recession average of around 84%.

Figure 4

Industrial capacity utilization is below pre-recession levels

Industrial capacity utilization rate, all industries, Canada

Source: Statistics Canada.

Canada's shaky economic foundations

Overall, notwithstanding strong population and employment growth and low unemployment, Canada’s economic fundamentals look shaky. Business investment per capita and per worker is lower than 11 years ago. Rapid population growth is contributing to higher employment, total hours worked and aggregate GDP, but it’s not boosting GDP per person. That means the economy is not generating meaningful gains in living standards. As the October federal election approaches, perhaps it’s time to ask policy-makers if they have any ideas on how they plan to turn this uninspiring arithmetic around.