The Mirage Of Canadian Economic Performance
One of the reasons that the Bank of Canada has remained rather adamant that the economy needs no additional stimulus from rate reductions is that the economy is operating very near its potential. The most recent estimates of economic expansion are for the 3rd quarter at 1.3%, not far from what is considered the country’s “potential GDP” estimated to be 1.7% for 2020-22.Potential GDP is the combination of growth in the labour force plus growth in productivity. However, much of the growth potential is derived from population growth and not from productivity gains. It is the latter measure that is the best gauge of economic performance. Let us first look at population growth.
The growth in the labour force is very much driven by population growth and here lies the essence of Canadian economic expansion. Canada’s population will have grown by 1.6% in 2019, the largest growth rate since 1990. By comparison, the US and UK will experience population growth of just 0.6% in 2019. Canada welcomed over 300,000 newcomers, most of whom are of working age and will contribute to much of the growth in the work force.The Canadian labour force has swelled by 560,000 new entrants or 3% over the last two years. Canada anticipates that a million permanent residents will be admitted from 2019-21. This surge in population is welcomed and needed to maintain a healthy economy. The growth in population has sustained a very buoyant housing market, growth in education and health services, for example.
However, the real contribution to economic well-being lies in growth in productivity. Productivity gains are the backbone of increased real wages and corporate profits. Growing by population alone is not sufficient to raise living standards. Canada’s productivity performance over the last two years has been dismal. Granted productivity growth varies considerably from quarter to quarter and from year to year. Yet, smoothing out the data, we see that a rate of about 1.5% per year is highly representative of what Canada has experienced, on average, for the past decade. However, we have fallen far short of that measure in the last two years. National output has grown largely from an expansion of the labour force and, if anything, the weakness in productivity growth has been a negative factor in some years.
Figure 1 Canadian Productivity Growth, Quarterly
Economists have long debated the sources of productivity growth and the reasons why it has not appeared to boost economic growth. A few basic reasons have been cited. There are problems in measuring labour productivity in a variety of services (e.g. health care) and less suitable substitute measures have to suffice. Canada’s resource sector, which historically has had large productivity gains, now represents a smaller portion of national output. Despite favourable low rates of interest, business investment has been very sluggish and has been a major disappointment. Finally, if there is to be any productivity gains from this new digital world, those gains have yet to show in the national accounts.