Thank you.
Canada is in the grip of its slowest decade for economic growth since the 1930s. This is evident in the average annual increase of just 0.8% in real GDP per capita over this period. This extended period of almost no growth has widened the gap between per capita growth in the U.S. and Canada. Since 2016, U.S. real GDP per capita rose a cumulative 11.7%, versus a 2.8% gain in Canada.
This divergence of growth between the two countries occurred before, during and after the pandemic. The ability of the U.S. to sustain growth over the past decade shows that Canada's stagnation was not the inevitable result of an aging population or the exhaustion of technological innovations, but instead reflects factors under Canada's control.
The most obvious sectoral sources of Canada's stagnation are in business investment and exports. Since 2014, business investment in Canada fell 17.6% in volume, compared with a 23.5% gain in the U.S. Meanwhile, after peaking in 2015, Canada's exports receded 0.4%, versus a 14% gain in the U.S. That's despite the stimulus from a 25% devaluation of the Canadian dollar.
Business investment in plants, equipment and exports of goods together account for 37% of Canada's economy. When over one-third of an economy contracts over an eight-year period, inevitably overall growth will be significantly reduced. This is especially true for investment and exports, which contain Canada's most productive and innovative technologies, because they face the most pressure to compete and innovate. The prolonged slump of business investment and exports also reflects the limitations of monetary policy to influence the industry's structure.
Slumping business investment in Canada is a particular concern. There is a growing sentiment that Canada has wasted a decade of low interest rates on more government debt and housing, rather than business investment. Low levels of investment resulted in an outright decline in the net capital stock available per worker in manufacturing and economy-wide. The long-run implications of falling capital stock levels per employee are worrisome since, “In the long run, GDP and the capital stock tend to grow at the same rate”.
Beyond the direct impact on overall economic growth, the persistent slump in both business investment and exports is symptomatic of structural shortcomings in Canada's economy. These include low rates of business formation, regulatory uncertainty and barriers to investment, restrictions on internal trade, faltering confidence of foreign investors in Canada, and low levels of productivity and innovation.
One manifestation of chronic weak business investment and low productivity is the OECD's forecast that Canada's per capita GDP growth between 2020 and 2060 will be the lowest amongst its 29 members. This underscores that Canada's economic growth will continue to falter for decades without fundamental changes in our approach to the economy. A return to sustained faster economic growth in Canada will not come from selecting from the menu of policies proposed by government advisers offering one-time boosts to incomes, but from harnessing the potential of Canada to innovate and from its entrepreneurs.
I'm going to skip a couple of paragraphs to save time here.
A return to sustained economic growth in Canada should be a bipartisan issue. Keir Starmer, the new leader of the Labour Party in Britain, acknowledged recently in an interview with The Economist that “economic growth is the absolute foundational stone for everything.”
Conversely, Paul Collier summarized the effect of slow growth, such as we have seen in Canada in recent years, by noting that while “Growth is not a cure-all...lack of growth is a kill-all.” In the absence of growth, societies are prone to adopting policies that hamper further growth such as protectionism and a destructive focus on the distribution rather than the creation of wealth. Such policies create a vicious circle that weakens business investment, innovation and entrepreneurship.
Economists have only an incomplete understanding of the forces that sustain economic growth over long periods. Broadly speaking, they have pursued two approaches. One focuses on higher inputs and greater efficiency, which is the goal of most policy initiatives. At best, they provide a one-time boost to incomes and often not even that in the absence of the proper environment for growth.
The second approach emphasizes innovation, which is more the product of a culture that encourages entrepreneurship. In the absence of such a culture, even adopting policies that should strengthen growth such as the free trade deals Canada has with all the other G7 nations, high rates of immigration and a high level of education will fail to raise growth.