Canada’s post-pandemic economic recovery was the 5th weakest in the OECD

2023/11/07 Leave a comment

Sobering reminder of the failure of current economic and immigration policy. The Business Council of British Columbia consistently has the most realistic perspective of the impact of high immigration levels among all the business organizations:

Canada’s economy has generated little prosperity for the average Canadian over the past 8 years. Government forecasts indicate the economy is also expected to generate little or no prosperity over the next 8 years (see Williams 2023a).

The first step to managing any problem is to acknowledge that you have one. In contrast, the 2023 Federal Budget (page 5) claimed:

Canada’s economy is now 103 per cent the size it was before the pandemic, marking the fastest recovery of the last four recessions, and the second strongest recovery in the G7. Throughout 2022, our economy demonstrated sustained strength, with Canada posting the fastest growth in the G7 over the past year. [emphasis added]

Similarly, in the 2022 Fall Fiscal Update, the government claimed (page 27):

“There is no country better placed than Canada to weather the coming global economic slowdown and thrive in the years ahead.” [emphasis added]

The federal government’s decision to focus on GDP in its statements (i.e., “the size of the economic pie”), rather than GDP per capita (“everyone’s share of the economic pie”), is unfortunate. Over the past year, Canada’s real GDP grew by around 1%, but the population grew by 3% (1.2 million persons), so in per capita terms the economy became about 2% smaller. GDP growth is being juiced by the government’s pursuit of the fastest population growth since 1957-58. The 1957-58 episode followed two major global events, the Hungarian Revolution and Suez Crisis, whereas the current period entirely reflects domestic policy choices.

It’s true that when the population increases, GDP increases. But does the economy get any better in terms of people’s living standards? What happens to everyone’s share of the economic pie? To answer those questions, we need to focus on GDP per capita.

How did Canada’s economy perform prior to the pandemic?

In the five years to 2019, Canada’s real GDP per capita grew by 3% (0.5% per annum). It was the 4th weakest performance out of 38 advanced countries (Figure 1). Canada lagged well behind the United States (9%), Euro area average (9%), OECD average (8%), and G7 average (7%).

Figure 1

How has Canada’s economy performed since the pandemic?

Canada is one of only eight advanced countries where real GDP per capita is lower than before the pandemic. For the change in real GDP per capita over 2019-22, Figure 2 shows percentage growth rates and Figure 3 shows growth in US dollars (adjusted for purchasing power parity, PPP, across countries).

Canada’s real GDP per capita was USD 200 (0.4%) lower in 2022 than in 2019. In contrast, it was USD 3,300 (7%) higher in Australia, USD 2,500 (4%) higher in the United States, USD 1,300 (3%) higher for the OECD average and USD 1,100 (2%) higher for the G7 average.

Canada’s post-pandemic recovery in real GDP per capita over 2019-22 was the fifth weakest out of 38 OECD countries. Only the economies of the United Kingdom, Iceland, Spain and Mexico have had weaker recoveries.

Figure 2

Figure 3

Immigration is not an economic panacea

Immigration, not productivity, is the centrepiece of the federal government’s economic growth plan. However, the academic literature overwhelmingly finds that immigration levels have a neutral or negligible overall impact on a country’s living standards as measured by labour productivity, real wages, the employment rate, the age structure of the population or, crucially, GDP per capita.

There is a strong consensus on these points among Canada’s top labour market economists:

The fact that immigration has an overall neutral effect on GDP per capita (i.e., on “everyone’s share of the economic pie”) in the long run means we need to look through the veneer of population growth to see what is happening to living standards. GDP per capita is a good metric for this.

Reality check

Unfortunately, the federal government’s economic statements tend to focus on GDP growth. In the current context, with turbocharged population growth and labour productivity falling, this is an unhelpful metric.

It is out of touch with the weak economy most families are facing:

  • Canada’s growth in GDP per person was the fourth-weakest in the OECD in the five years before the pandemic to 2019.
  • Canada is one of only eight advanced countries where average real incomes are lower than before the pandemic, as inflation outpaces growth in nominal incomes. 
  • Canada’s recovery in real GDP per capita was the fifth-weakest in the OECD over 2019-22.
  • The OECD projects Canada will be the worst performing economy among the 38 advanced economies over both 2020-30 and 2030-60, with the lowest growth in real GDP per capita (see Williams, 2021).

Young and aspirational Canadians face 40 years of stagnation in average real incomes (Williams 2021). The principal reason is that Canada is expected to rank dead last among OECD countries for growth in labour productivity over most of 2020-60. Our workforce is less productive than workforces in peer countries (in terms of output per hour worked) because of relatively lower levels of non-residential capital investment per worker, lower levels of innovation and R&D, and because the average firm is less likely to export and produce output at scale.

Ignoring a problem does not make it go away

The federal government was so alarmed by Chart 28 of the 2022 Federal Budget (pages 25-26) – showing Canada dead last among 38 advanced countries for projected growth in real GDP per capita over 2020-60 – that it took bold and decisive action: by erasing any mention of this issue from its 2023 Federal Budget. The omission was not lost on columnist Andrew Coyne at the Globe and Mail.

Ignoring a problem does not make it go away. Canada’s structural problems need to be acknowledged (Williams (2023b)) and our economic policy mix needs rethinking (Williams and Finlayson (2023)).

Canada needs a prosperity-focused policy agenda focused on improving conditions for non-residential business investment, innovation, technology adoption and exports. With the Fall Economic Statement due in November, we encourage the federal government to take this opportunity to address these issues.

Source: Canada’s post-pandemic economic recovery was the 5th weakest in the OECD

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Why GDP per capita is becoming the indicator to watch

2023/04/21 Leave a comment

Indeed:

Canada has been the worst performing advanced economy in the Organization for Economic Co-operation and Development since 1976. Governments of all partisan stripes have tried and failed to reverse the trend. If nothing changes, the OECD projects, our economic growth per capita will continue to stagnate for decades to come. This article is part of an occasional series called Per Capita, which examines how and why policy interventions have come up short – and how fresh approaches to economic growth are urgently needed.

A growing cohort of analysts are tempering their enthusiasm for Canada’s recent economic performance for a simple reason: Strong population growth is bulking up the numbers.

Last week, the Bank of Canada projected that real gross domestic product would increase by 1.4 per cent this year, up from a previous forecast of 1 per cent, and by 1.3 per cent in 2024. The central bank said a key factor in its 2023 upgrade was the surge in population, which is expanding the pool of labour and consumers.

Canada’s population rose by just more than one million people in 2022, an annual increase of 2.7 per cent that was the largest since the late 1950s. This is part of a deliberate plan from the federal government to boost population through higher immigration.

For that reason, some economists say they’re paying more attention to growth in real GDP per capita – or economic output per person, adjusted for inflation – than they used to. And on that front, Canada’s economic performance is decidedly weaker: Per capita output in 2022 was roughly the same as in 2017.

The near-term outlook doesn’t show much upside. Even if population growth cooled to 2019 levels, per-capita GDP would still decline for the next two years, based on the Bank of Canada’s projections for output.

“I don’t see that the federal government is focused on per capita GDP, they’re just focused on GDP,” said David Williams, vice-president of policy at the Business Council of British Columbia.

“If you crank up population growth, sure, the economy gets bigger. But that doesn’t mean that we’re not facing stagnating living standards for the majority of Canadians.”

GDP per capita is often used as a proxy for living standards. The metric is positively correlated with life expectancy and well-being – residents of more productive countries tend to live longer and report being happier.

It is not a perfect measure of prosperity. Per capita output in Canada is around three-quarters of that in the U.S., according to data from the Organization for Economic Co-operation and Development, although Canada enjoys an average life expectancy at birth that is roughly five years longer. However, the U.S. is an outlier in life expectancy among wealthier countries.

Canada’s productivity struggles are hardly new and have been debated for decades. Benjamin Reitzes, a macro strategist at Bank of Montreal, recently noted that the average annual growth in real GDP over the past 10 years was 1.8 per cent, but only 0.6 per cent after adjustments were made for population gains.

Ottawa is aware of this issue – and the potential for decades of mediocrity. In the 2022 budget, the federal government mentioned an OECD forecast that predicts Canada will have the weakest per capita growth among its member countries from 2020 to 2060. “The stakes are high. Most Canadian businesses have not invested at the same rate as their U.S. counterparts,” read the budget.

While Ottawa has acknowledged this productivity issue, some economists are calling on governments to focus more on per capita growth and how to bolster it. (The 2023 federal budget did not repeat its mention of the OECD projection.)

“No per capita growth means Canadian living standards are stagnant,” Mr. Reitzes wrote in a recent note to clients. “Historically, policy makers haven’t paid much attention to the per capita metric. Hopefully, that changes soon.”

The federal government is ramping up immigration levels in the coming years, targeting the intake of 500,000 permanent residents annually by 2025. Most of Canada’s population growth last year was driven by temporary residents, including workers and international students.

Ottawa has frequently said that raising immigration levels is necessary to fill jobs and boost economic growth. However, some of its recent policy decisions have made it easier to fill low-wage roles in lower-productivity sectors with temporary foreign workers.

“We’ve normally tried to target the best and brightest,” said Mr. Williams. “But it seems that there’s been a shift in Ottawa toward saying, ‘Hey, let’s fill these very-low-wage, entry-level jobs.’ And that’s a concern.”

Source:Why GDP per capita is becoming the indicator to watch

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Immigration is not a cure-all for Canada’s economic woes

2020/10/14 Leave a comment

A useful and needed reminder that Canada has been relying too much on immigration for overall economic growth rather than addressing some of the fundamental challenges related to productivity:

Jock Finlayson is the executive vice-president and chief policy officer of the Business Council of British Columbia. David Williams, DPhil, is the council’s vice-president of policy.

Immigration inflows to Canada have fallen off a cliff since the COVID-19 pandemic. In the second quarter of 2020, permanent resident arrivals were down by two-thirds from a year ago. Temporary work permits issued to foreign workers were down by half. And permits for international students were about 80-per-cent lower.

By contrast, prior to the pandemic, net temporary immigration was a record 191,000 and permanent immigration reached 341,000 last year – the highest since 1911-13. As a result, Canada’s population increased by a record 550,000 people last year, with much of that growth concentrated in the gateway metropolitan areas of Toronto, Vancouver and Montreal.

The immigration slump has set off alarm bells in some quarters. The concern is that without a prompt return to turbocharged immigration levels, Canada’s economy is in jeopardy. In our view, these concerns are exaggerated and overlook the humble arithmetic of economic growth.

Growth in gross domestic product (GDP) comes from two sources: increases in “labour inputs” (more workers and/or more hours of work); and increases in “labour productivity” (more GDP per employee or per hour of work) because of investments in capital, skills, technologies and economies of scale. Canadian policy discussions overwhelmingly focus on boosting labour inputs, while paying scant attention to the drivers of productivity. This is a remarkably unbalanced approach.

Canada’s economy stumbled into 2020 with a national growth strategy that was yielding low unemployment – and flushed gateway city real estate markets – but little or no gains in GDP per capita, productivity and real wages. Canada could scarcely manage topline GDP growth of 2 per cent without overheating and prompting higher interest rates from the Bank of Canada. That’s hardly impressive for an economy operating near full employment.

In the five years to 2019, fully four-fifths of Canada’s GDP growth was because of increases in aggregate working hours as the labour force steadily expanded. During the same period, labour productivity – which largely determines average real wages and living standards in the long run – made its smallest contribution to GDP growth since the 1980s. On a per worker basis, business investment was weaker last year than in 2008. Putting all the pieces together, GDP per capita inched ahead by a paltry 0.3 per cent per annum over the five years to 2019.

In other words, Canada’s economy was growing mostly because it was adding more people (especially in the big cities). But owing to weak investment and feeble productivity growth, the economy wasn’t getting much “better” in terms of making the average Canadian more prosperous.

There are benefits from immigration – a larger pool of workers and skills, more domestic customers and densification of the big cities. But research from leading Canadian economists generally finds that immigration numbers have an overall neutral effect on real wages, employment rates, labour productivity and GDP per capita. In addition, immigration has only a small impact on the age structure of the population. That’s because annual immigration flows are dwarfed by the existing population, and also because newcomers age along with everyone else.

Canada is on a long road to recovery from the COVID-19 recession. In the coming years, policy makers should focus on spurring labour demand, restoring full employment and improving competitiveness. This will require creating better conditions for investment and technology adoption, for Canadian companies to scale up and innovate, and for the work force to upskill and reskill in the face of digital transformation and automation trends. These are the surest paths to economic growth and prosperity – on a per capita basis, for both urban and regional communities, and over the short and the long term.

Source: https://www.theglobeandmail.com/business/commentary/article-immigration-is-not-a-cure-all-for-canadas-economic-woes/

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