“The Canadian economy is now smaller than in 2019 when adjusted for inflation and immigration. Canada has fallen from the 6th most productive economy in 1970 to the 18th as of 2022,” according to the World Organization for Economic Co-operation and Development.
By Max Singh
There is no doubt that even though Canada consistently ranks amongst the most desirable places to live and has an enviable quality of life, Canada has a problem with economic growth. Rampant inflation, a runaway housing market, unaffordability, and tenuous economic metrics have born this out. The economic drive that rocket fuelled the country in the last few decades has worsened since the pandemic. Our economy is now smaller than in 2019 when adjusted for inflation and immigration. According to the World Organization for Economic Co-operation and Development, Canada has fallen from the 6th most productive economy from 1970 to the 18th as of 2022. So, what are the critical reasons for Canada’s declining economic weakness?
“Household debt in Canada is now the highest of any G7 country, according to data by the CHMC (Canada Mortgage and Housing Corporation). This makes the economy vulnerable to any economic crisis, especially regarding housing.”
- Dependence on the U.S. economy and energy prices
The Business Council of Canada articulates this view well and outlines the case in a recent report. Although the two-way energy trade of oil, natural gas, electricity, and uranium reached a record total 2023 of $156 billion (U.S.), according to the Business Council, Canada must not take this energy security partnership for granted. Potential severe disruptions loom, especially if Canada’s intentions to impose a cap on the emissions produced by its upstream oil and gas sector go forward as envisioned. With a new American President and administration set for 2025, the Canadian energy sector must brace itself for significant upheavals just in case the U.S. implements taxes and tariffs, as indicated by the Trump Administration. Look for higher tariffs on Canadian exports to the U.S. and higher prices for U.S. imports that will affect the economy.
- Loss of competitiveness in manufacturing and low labor productivity
The causes of the low productivity of Canadian companies are well documented. According to Canada’s Department of Finance, there is an urgent need to prevent further decline. A recent Royal Bank of Canada report reveals that Australian workers are almost 10% more productive than Canadians. Australia’s economy has grown 50% per person faster than Canada’s over the last 25 years. Canada is further behind the United States, 30% less productive than the U.S. in terms of working output.
Bank of Canada Senior Deputy Governor Carolyn Rogers said at a recent press conference that addressing the issue of low Canadian productivity is a fundamental issue, “Canada should focus more on ensuring the training and education we provide to teach the skills we need for jobs today and in the future and increase productivity.”
- Insufficient R&D Expenditure
Canada’s R&D (Research and Development) investment is low compared to other countries. Canada invests only 1.55% of its GDP(Gross Domestic Product.) in R&D, less than the World Organization for Economic Co-operation and Development (OECD) average of 1.99%. Canada also has a low ratio of large firms to small and medium-sized enterprises (SMEs) compared to the United States—making it challenging for Canadian firms to grow. Also, Canada’s complex taxation system, laws, and regulations make it difficult or a disincentive for new businesses to invest. Meanwhile, other countries that offer high salaries and lower living costs often lure the best R&D talents. According to the Business Council of Canada, what is needed is a more structured, attractive, tangible way to attract and retain the best R & D talent with more funding and investing tax breaks for companies.
- High household debt and deteriorating housing affordability
Household debt in Canada is now the highest of any G7 country, according to data supplied by the CHMC (Canada Mortgage and Housing Corporation), Canada’s national housing agency. The amount Canadian households owe is also higher than the country’s entire GDP. The CHMC says high home prices are to blame for the ballooning debt. Also highly high is Canadians’ appetite for credit card debt, personal loans, and other household debt. In contrast, household debt has shrunk in the U.S. and the UK in the last 10 years.
“Unfortunately, Canada’s elevated levels of household debt—the highest in the G7—makes the economy vulnerable to any global economic crisis,” said Aled Ab Iorwerth, the agency’s deputy chief economist. Mr Ab Iorwerth said that 75% of Canada’s household debt comes from mortgages. In Canada, home prices are the highest in Vancouver, British Columbia. The average price for a property is around $1.29m. Toronto and Vancouver consistently rank among the world’s top 10 unaffordable cities. There are many roots in the housing affordability crisis. The key reasons are simple: supply and demand mean fewer houses not being built fast enough for a growing population that has been accelerating due to Canada’s immigration programs. An important factor is the lack of skilled construction workers, increasing red tape around permits and planning applications, and the rise of material costs and interest rates. Also necessary is the commodification of houses as assets to be held onto and hoarded by investors rather than released into the housing market. This forced scarcity has accelerated house prices and rental rates in Canadian history.
Canada is not unique in its economic problems; many developed countries have similar issues exacerbated by the aftermath of the global pandemic, supply chain woes, regional wars, and the shift in politics to the right across the world. However, the key takeaways remain: Canada must find new strategies to increase worker productivity and competition and invest in training skilled workers. There is also a need for more research and development, improving incentives, and a review of energy policy and our economic relationship with the U.S. Economists also say that reducing barriers to trade and investment internally and externally will also help the economy.
Sources: Statscan Canada, Statistics Canada’s Multifactor Productivity Program. Fraser Institute, TD Economics, Bank of Canada, Royal Bank, National Accounts Longitudinal Microdata File (NALMF). Canada Real Estate Association, The Canada Mortgage and Housing Corporation. Canada Business Council, World Organization for Economic Co-operation and Development.
