Economic growth in Canada is expected to slip to 1.3 per cent in 2019, according to the Bank of Canada’s latest Monetary Policy Report. The fact it is positive at all owes to a surging population. Canada’s population typically increases by around 1 percent each year. It is currently growing at 1.4 percent, the fastest pace in a generation.
When a rising population rather than innovation, business dynamism or higher productivity drives the growth of the “economic pie,” headline gross domestic product (GDP) becomes less reliable as a gauge of progress. We need to look deeper to assess the economy’s strengths and its ability to produce improvements in overall living standards.
In per capita terms, Canada’s economy is stagnant: there has been no increase in real GDP per person since mid-2017. The pattern over the past decade isn’t much better. If you think GDP per person doesn’t matter, consider a new report by Simon Lapointe of the Centre for the Study of Living Standards. He finds that Canada’s real GDP per person is about 18 percent lower than the U.S. The gap is due to Canada’s lower labour productivity (output per hour worked), partly offset by our greater labour utilization (hours worked per capita). Notwithstanding this gap, Lapointe finds that Canadian households in the bottom 56 percent of the distribution enjoy higher incomes than similarly placed American households.
The reason so many Canadian households are better off than their American counterparts, even though GDP per person is lower, is that Canada’s distribution of pre-tax incomes is less concentrated than in the U.S. When Canada boosts GDP per person, the gains are more widely shared. But this also means that when Canadian households aren’t getting ahead, it’s likely because the economy isn’t generating meaningful increases in GDP per person. That’s the current situation.
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 increased 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 to work with.
Unfortunately, Canadian business investment per capita has been falling since late-2014. Moreover, all forms of business investment – including machinery and equipment, non-residential structures and intellectual property products – are now significantly below their pre-recession (2008) levels, measured in real per capita terms (see table).
With labour supply increasing and real wage growth muted, 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.
Despite a robust job market, Canada’s economic foundations look shaky. Business investment per capita is falling. Rapid population growth is contributing to higher employment, hours worked and aggregate GDP, but it’s not lifting GDP per person. And GDP per person is what matters, especially given Canada’s more even distribution of household incomes relative to the U.S.
Many experts believe the so-called fourth industrial revolution, centered on digitalization and automation, will lead to a more innovative and capital-intensive economy. Yet Canada appears headed in the opposite direction: low levels of investment, chronically weak business innovation, meagre productivity gains, and an increasingly labour-intensive economy. As the federal election approaches, perhaps it’s time to ask policy-makers how they plan to turn this uninspiring arithmetic around.
David Williams is Vice President of Policy at the Business Council of British Columbia. Jock Finlayson is the Council’s Executive Vice President and Chief Policy Officer.
As published by the Globe and Mail.