Looking great for Canada

Not Really. Reposted - March 1, by Andrew Coyne, Globe & Mail.

The growth crisis deepens. The latest figures from Statistics Canada confirm that Canada suffered another decline in per capita GDP in the fourth quarter of 2023: the fifth decline in the past six quarters, the worst sustained drop in more than 30 years. After adjusting for inflation, per capita GDP is below where it was nine years ago in the fourth quarter of 2014.

Most news reports focused on the fact that the GDP itself (i.e. total output, not per capita) did not drop but eked out a 0.2-per-cent gain after the third quarter’s small decline – meaning Canada “dodged a recession.” However, the problem with Canada’s economy is not cyclical but secular; it is not one of utilization but capacity. It is not so much that growth is temporarily below potential as that potential growth has slowed to a crawl.

Nor is this a short-run problem. It has been going on for decades. After inflation in the 1950s and 60s, Canada’s economy grew at more than 5 per cent annually by the 1970s, that had slowed to roughly 4 per cent, to 3 per cent in the 1980s, to 2.4 per cent in the 1990s, to 2 per cent in the 2000s. Over the past 10 years, it has averaged just 1.7 per cent. Last year, it was 1.1 per cent.

More to the point, the economy is growing slower than the population, which is why per capita GDP is falling. And per capita GDP really counts, as far as living standards are concerned.

At some point, all this will shake Canadians’ sense of their place in the world. If you took a poll, I suspect most Canadians still think of us as one of the richest countries on Earth: maybe fifth or sixth. And at one time, we were. As late as 1981, Canada ranked sixth among OECD countries in GDP per capita, behind only Switzerland, Luxembourg, Norway, the United States and Denmark.

But we’re not any more. As of 2022, we were 15th. Over the 40-odd years in between, Canada’s per capita GDP grew more slowly than that of 22 other OECD members. Countries that used to be poorer than us – Ireland, the Netherlands, Austria, Sweden, Iceland, Australia, Germany, Belgium, Finland – are now richer.

And over the next 40 years? You may recall that the arrest chart in the 2022 budget projected Canada would have the slowest growth in per capita GDP among OECD countries out to 2060. We need to comprehend what this means fully. We are no longer one of the richest countries on Earth. Among the richer countries, we are on course to being one of the poorer.

The picture is particularly distressing when you compare where we are with our nearest neighbour. As of 1981, the per capita GDP in Canada was 92 per cent of that of the U.S.; by 2022, it had fallen to just 73 per cent. Drill down into the national data, and it looks even worse. The economist Trevor Tombe has shown that Canada’s richest province, Alberta, would rank 14th among U.S. states. The poorest five provinces now rank among the six poorest jurisdictions in North America. Ontario ranks just ahead of Alabama. British Columbia is poorer than Kentucky.

Even this somewhat overstates our position. Canadians work more hours, on average than people in other countries. Measured in output per hour worked – what we mean by labour productivity – we ranked 18th in 2022, having posted the slowest rate of productivity growth in the OECD since 1981, but for Switzerland. Given our performance in 2023, I don’t think we should be surprised to find we have since dropped out of the top 20.

Again, the contrast with the United States is striking: Up to about 2000, labour productivity in the two countries grew at roughly comparable rates. Since then, U.S. productivity has grown nearly three times as fast.

MORE STORIES BELOW ADVERTISEMENT

00:01 / 00:30

It is a dismal prospect. When an economy ceases to grow, it isn’t only living standards that suffer. It’s everything they represent. A society that cannot look forward to a future of rising living standards is deprived of one of the primary motive forces of human behaviour – hope. Without the universal lubricant of growth, all of the social divisions – between the classes, generations, sexes and races and (this is Canada, after all) regions – are likely to be more inflamed.

That might seem merely like a problem, something to be endured or remedied, but not an immediate emergency. It is a slow-moving crisis thanks to the remorseless arithmetic of population ageing.

As the postwar baby boom works its way through the country’s age distribution, and as everyone lives longer, the combined effect is to create a society unlike any that has ever existed. By 2040, roughly 25 per cent of the population will be over 65, up from 19 per cent today. Compare that with the early 1970s, when the over-65s comprised just 8% of the population. Within that total, the proportions over the age of 75, 85, 95, and beyond will exceed previous records by even wider margins.

(For example: In 1971, the proportion of the population over 85 was roughly six-tenths of 1 per cent. It is more than three times as high today, at 2.3 per cent. It will have doubled again in twenty years from now, to between 4.5 per cent and 5 per cent.)

This has two obvious implications. One is cost, particularly the cost of health care. As a rule of thumb, per capita health care consumption doubles every 10 years over the age of 55. Now add in the cost of pensions, elderly benefits, and so on. All told, the C.D. Howe Institute’s Parisa Mahboubi calculates population ageing represents a net unfunded liability (promises to pay future beneficiaries of government programs beyond those for which revenues have been set aside) on the order of $ 3.9 trillion.

That’s on top of the unfunded liabilities in the Canada Pension Plan – another $ 1.2 trillion or so, plus whatever is lurking in the Quebec Pension Plan’s books. On top of the federal net debt of $ 1.2 trillion. On top of provincial debts totalling roughly $800-billion. Add it up, and that’s an implied public-sector obligation above $ 7 trillion, or nearly 2½ times our annual GDP.

Now, the second implication is relatively fewer people of working age. Not too long ago, there were as many as five workers for every retiree. Before long, that ratio will have fallen closer to 2.5 to one. No doubt increasing numbers of people will elect to keep working past 65, but not enough to make much of a dent in the basic arithmetic of population ageing: much higher costs, with fewer people to pay for them.

The only way out is faster growth. It doesn’t have to be much faster; so long as it is sustained, we get the magic of compounding working in our favour. If we can get our growth rate up and keep it there, year after year, decade after decade, the next generation or two will be so much richer than we are that they can afford to look after us in our dotage.

This is why it is right to call this a growth crisis: it has all but petered out the moment we most need growth to pick up. This is especially annoying because it is rarely discussed in our politics. Party leaders hammer away at each other overgrowth in the short term, though they can do very little to alter it. But long-term growth barely rates a mention.

Yet this is the sort of growth that governments can do something about. For all the fruitless debates about macroeconomic stabilization policy and which form of stimulus, fiscal or monetary, is least ineffective at raising growth in the short term, the long-term growth trajectory of an economy is responsive to policy.

To be sure, Canada’s failing productivity has many sources and remedies. I’ll just flag one or two for now. One is our anaemic rate of investment, or as it is called in the statistical world, gross fixed capital formation. The alarming deterioration in our productivity performance closely tracks the extraordinary relative decline of business investment in Canada.

The OECD tracks investment across its 38 member states plus nine others. From 2011 to 2015, the growth rate of investment in Canada was merely awful: 37th out of 47. From 2015 to 2023, it was appalling: 44th, ahead of only South Africa, Mexico and Japan.

Simply put, our workers are less productive than other countries’ workers because they have less capital to work with. As recently as a decade ago, gross fixed capital formation per worker in Canada was within striking distance of the United States: about 95 per cent. It has since declined to roughly two-thirds. A similar decline has been observed relative to the OECD generally.

So, getting our investment rates up is one part of the solution. It matters, however, where the investment goes: what you invest in and how much you invest. Disaggregate investment into its parts, and you find a striking and potentially troubling trend.

Since around 2000, while business investment in residential structures has roughly doubled as a percentage of GDP, investment in machinery and equipment has roughly halved. Could this explain why our relative productivity growth fell sharply after that

? Have we been so busy capitalizing on rising housing prices that we neglected to invest in the things that make it possible to afford a house?