Thanks for having me back.
I'm the former chief economic analyst at Statistics Canada, so the perspective I bring is one of macroeconomics, the broad trends. I believe there have been two dominant trends in Canada's economy over the past decade, neither of which is discussed enough, if at all. We are stuck in a period of persistent slow growth, while at the same time Canada has seen its debt levels soar. The combination of these two makes Canada vulnerable to a downturn in the turbulent global economy.
Chronic slow growth can be demonstrated in a number of ways. The per capita growth of real GDP, or incomes, over the 2010s was 1%, the lowest since the 1930s. Decadal growth does not lie about the long-term trend of growth. It cannot be dismissed as a misfortune from transitory events. Even more remarkably, slow growth in the 2010s was not dampened by even one recession. Instead, it reflects subpar income gains persisting year after year.
Another thing to highlight with regard to how weak growth has been is this: After the economy peaked in 2008, growth over the next 11 years was no better than in the 1930s after its peak in 1929. Rather than the boom-and-bust cycle of the 1930s, we have had persistently slow growth since the 2009 recession, leaving cumulative GDP growth exactly the same as in the decade after 1929. Slow growth is not as spectacular as the 1930s depression, but its long-term effects are just as insidious and corrosive. This is particularly true of the misguided focus on income distribution. The income of average Canadians has stagnated because of slow overall growth, not because the fruits of that growth are growing disproportionately to those of upper income.
Even as income growth has slowed to a crawl, Canada has racked up one of the world's largest debt burdens. According to the Bank for International Settlements, Canada's debt-to-GDP ratio stood at 306 in 2019, up one third from 2008. This compares with an average increase of 13.8% in advanced market economies.
The BIS alone among international organizations warned of the perils of excessive debt growth and trade imbalances leading up to the great financial crisis. Since then, the BIS has repeatedly warned about the negative consequences for long-term growth from relying on monetary and fiscal demand stimulus while ignoring structural reforms that enhance productivity.
Most recently, the BIS has explicitly warned about Canada's debt, stating that when it comes to “aggregate credit...vulnerabilities...Canada, China and Hong Kong SAR stand out, with both the credit-to-GDP gap and the [debt service ratio] flashing red.” In assessing credit conditions, it found Canada at risk for all four categories. No other country was found at risk for all four indicators.
Canada's high level of borrowing reflects how all sectors have gorged themselves on debt since interest rates were cut to historically low levels during and after the 2008-09 recession. Each of the three sectors of domestic demand—that is, households, corporations and governments—has raised its debt load to about 100% of GDP. Canadian households led the borrowing binge with household debt rising to 100% of Canada's GDP. This is the highest of any nation outside of Denmark, and nearly twice the G20 average of 60%.
Non-financial corporations in Canada have borrowed the equivalent of 119% of GDP, more than any other major industrial nation. Borrowing by Canada's government stood at 85% of GDP, not far behind the 98% in the European area and 99% in the United States, both of which had to spend liberally to bail out their banks during the great financial crisis. Government borrowing in Canada is more skewed to the provinces, because our federation is the most decentralized and because provinces are especially vulnerable to slumps in key export markets and are unwilling to adjust their spending accordingly.
The combination of weak income growth and high debt levels leaves Canada in a very precarious position if either interest rates rise or global growth slows significantly. The lesson that we should have learned from the 2008 financial crisis in the U.S.—2010 in the EU—is that debt very quickly can become unbearable when the economy slumps. Downturns usually necessitate extensive government intervention, at which point a seemingly benign government fiscal position suddenly becomes acute.
How did Canada's economy become so vulnerable, and why is there so little discussion of the risk of slow income growth and high debt? Much of the problem is that orthodox economic thinking has a stranglehold on macroeconomic policy-making and research in most nations, including Canada. Every temporary slowdown elicits calls for more monetary and fiscal stimulus to demand, with no recognition of the price they exact from potential growth over the long term.
Worse, the guardians of economic orthodoxy apparently resist self-examination or external criticism, even from leading economists such as Larry Summers, William White and the BIS.
While most economists are reluctant to acknowledge a threat from excessive reliance on short-term demand, stimulus and high debt levels, many ordinary people sense the precariousness of the current state of the economy. This is why so many Canadians feel anxious about the state of the middle class and their own finances. While the unemployment rate is low, as older members of the labour force retire, Canadians experience daily the difficulty of servicing their debts, generating higher incomes, and the struggles of their children entering the labour market. It is time to reject the continuation of policies that have obviously failed to generate growth over the long term, and instead prioritize the creation of income over its distribution.
Thank you. I look forward to your questions.