According to the Bank of Canada's most recent monetary policy report, economic growth in Canada will slow to 1.3% in 2019. That it is positive at all owes to a high population. Every year, the people of Canada grow by about 1%. It is now expanding at a rate of 1.4%, which is the fastest rate in the last generation.
When a rising population rather than innovation, business dynamism, or improved productivity drives the expansion of the "economic pie," headline gross domestic product (GDP) becomes less trustworthy as a development metric. We need to examine the economy's strengths and its capacity to make gains in overall living standards.
Canada's economy is in a state of stagnation: real GDP per person has not increased since the middle of 2017, and the trend over the last ten years hasn't been much better either.
GDP Has a Major Role
If you think GDP per person doesn't look important, consider a recent report by Simon Lapointe of the Center for the Study of Living Standards. According to his calculations of him, the actual GDP per person in Canada is 17% lower than in the United States. Our lower labor productivity (output per hour worked) is somewhat countered by our higher employment of workers, resulting in the discrepancy (hours worked per capita). M. Lapointe nevertheless finds that Canadian households in the lowest 56% distribution had better earnings than identical American households, notwithstanding this disparity.
So many Canadian households are better affluent than their US counterparts, even if GDP per person is smaller because Canada's distribution of pre-tax earnings is less concentrated than in the United States. The benefits accrue to all Canadians when the country's GDP grows at a faster rate per person. But this also implies that when Canadian households aren't moving ahead, it's likely because the economy isn't creating substantial improvements in GDP per person. That is the state of affairs at the moment.
Population Policy Influence the Labor-Intensive Economy
Canada's population policies likewise seem to create a more labor-intensive economy: more employees but less capital per worker. While labor force and employment growth have boosted total hours worked and GDP, business investment has lagged. Business investment is a crucial contribution to GDP per person through its influence on capital intensity and productivity. Workers are more productive when they have more and better tools and technology with which to work.
Unfortunately, since the end of 2014, corporate investment in Canada has decreased per person. Moreover, all kinds of corporate investment - including machinery and equipment, non-residential constructions, and intellectual property items - are currently well below their prerecession (2008) levels, evaluated in real per capita terms.
Businesses are less likely to feel pressured to invest in modern capital equipment, and new technologies - that is, in things that increase productivity and living standards over time - because of the rising supply of workers and the slowing rise of real wages.
Despite a booming employment market, Canada's economic fundamentals appear weak. Business investment per capita is declining. Even though rising populations are boosting employment, hours worked, and GDP, they are not raising per capita income. Because of Canada's more equitable distribution of family income compared to the US, GDP per person is more important.
Digitization and automation, sometimes referred to as the "fourth industrial revolution," are widely expected to result in a more creative and capital-intensive economy. On the other hand, the Canadian economy looks to be heading in the other direction: low levels of investment, chronically poor corporate innovation, modest productivity growth, and an increasingly labor-intensive economic model. As this fall's federal election approaches, maybe it's time to ask policy-makers how they propose to turn this dismal arithmetic around.
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