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According to the OECD, Canada will be the worst performing advanced economy over the next decade (2020-2030) and the next three decades (2030-2060). This is a concerning projection for Canadians, as it predicts stagnating real income growth and falling living standards during the peak earning years of today's workforce. To avoid this result, current federal economic policies must be urgently rethought in order to focus more directly on creating productivity increases that can lead to broadly shared wealth.

Historical Context

From 2007 through 2020, Canada's real GDP per capita rose at a rate of 0.8% per year, placing it in the third quartile of advanced economies. Poor labour productivity gains stifled growth, with Canada once again ranked near the bottom of this critical competitiveness metric. Inadequate company investment in capital and technology upgrades, as well as insufficient government incentives and supports to foster innovation, commercialization, and enterprises functioning at a large scale, were all causes. At the same time, despite record high immigration admissions, Canada saw little improvement in labour utilization over the period. Previous demand-stimulating measures have been ineffectual at raising real earnings over time.

Trudeau's Economic Policies and Their Impact

The Trudeau government has depended primarily on four pillars of expansionary monetary and fiscal policy, the most important of which is high immigration. The Bank of Canada has pursued low interest rates in order to stimulate the housing and other interest-sensitive sectors. Massive deficit spending has been released fiscally, with no apparent debt anchor. Immigration targets have been increased to more than 1% of the population every year, the highest sustained levels in almost a century.

While demand-side stimulus can provide a temporary lift, it has failed to incentivize productivity improvements and investment in inventive capacities that are required to strengthen Canada's international competitiveness. Immigration has no significant impact on the age structure of the Canadian population or the expense of healthcare for an aging population.

Labor Productivity: The Crux of the Problem

Labour productivity is defined as the amount of actual economic production produced per hour worked. Because it is less limited than rising labour usage, growth in labour productivity is the key predictor of long-term advances in living standards. Canada's low real per capita GDP growth is explained by the country's lacklustre productivity growth across all sectors.

While Trudeau's policies have increased demand in the short term, they have failed to promote company investments in technology, innovation adoption, and R&D commercialization, all of which are necessary for productivity improvements. Canada rates badly in terms of helping high-growth enterprises, and there is little competitive pressure on incumbent firms to become more productive. To foster capital deepening, knowledge dissemination, efficient business scaling, and resource reallocation to more productive sectors, tax, regulatory, and structural reforms are required.

For decades, Canada has lagged behind other industrialized economies in terms of productivity growth. To reverse this trend, incentives for private sector investment in machinery, equipment, patents, employee training, and public infrastructure must be expanded. It will be critical to learn from policy advances in countries on the cutting edge of productivity growth.

Labor Utilization: A Double-Edged Sword

Total hours worked in relation to population size is referred to as labour utilization. While increased labour participation may yield some benefits, gains in labour usage are intrinsically constrained by demographics, culture, and the restricted amount of time people can work.

In order to increase labour supply, the Trudeau government has increased immigration to historic levels. However, immigration has proven to be unproductive in terms of long-term growth in real GDP per capita. Canada's immigration intake, while gradually increasing, remains tiny in comparison to the entire population. Immigrants' age distribution is similar to that of the native-born population. As a result, immigration has no significant impact on Canada's age structure. However, high levels of immigration put a burden on housing affordability and urban infrastructure.

Given aging populations, labour utilization rates may fall in the absence of significant increases in immigration. However, immigration-led expansion reduces productivity by allowing enterprises to expand without investing in capital or innovating. To counter demographic headwinds, a strategy centred on increasing productivity growth is still required.

Comparative Analysis with Other Advanced Economies

According to the OECD, Canada will have the lowest economic growth rates during the next decade and the next three decades. Other advanced countries are actively positioning themselves to compete with Canada by implementing productivity-boosting policies.

Countries such as Australia, innovative Zealand, Singapore, and Ireland have enacted competitive tax and regulatory frameworks to encourage company investment in innovative technology and higher-value industries. Workforce skills and crucial public infrastructure for innovation have been prioritized. Industry cluster methods involve fostering globally competitive domestic enterprises in high-productivity sectors.

More competitive taxation, simpler regulations, wiser urban planning, and workforce skill alignment with fast-growing fields in Canada could aid in the development of globally leading innovation centres and firms. However, unless big reforms are implemented, Canada risks falling behind as other countries prepare for future high-productivity industries.

Why is this important to you?

With living standards stagnant, Canada must urgently adjust economic tactics to prioritize productivity over demand stimulation and labour force expansion. Reforms in taxation, regulation, urban planning, and skills training must all be aimed at stimulating corporate investment in new technologies, commercializing innovation, and nurturing highly dynamic enterprises in tradable industries. Adopting best practices from the most competitive OECD countries will be critical.

Canada cannot afford to be complacent, with competitiveness deteriorating and demographics weighing on growth. Only concentrated efforts to develop a vibrant ecosystem for productivity-boosting investments in human and physical capital will allow for broadly shared prosperity in the coming decades.

Personal Notes

Last week, we took a brief hiatus to enhance our marathon macro forecasting algorithm, expanding our coverage to more countries. While we previously mentioned that Asia and Africa would be our main focus, certain developments in North America are too significant to overlook. As always, I'm sending this note from Taiwan, enjoying a cup from my favorite green tea shop.

Catch up with you next week!