As Canadians flex their patriotic muscles and hold “elbows up” in response to punishing U.S. tariffs, many might be surprised that another economic crisis has been percolating here for years — from inside the country.
It effectively dropped Canada into recession months ago, has left us as poor as the residents of Alabama and is so dire, the usually circumspect Bank of Canada warned it’s time to “break the glass” and sound the emergency.
For this at least, U.S President Donald Trump can’t be blamed.
“We have been fundamentally weak in this country for 10 years,” Stephen Poloz, former governor of the Bank of Canada, said in an interview. Some experts say for much longer.
The issue is the country’s steadily declining rates of per-capita gross domestic product (GDP) and “labour productivity” — decidedly unsexy terminology for issues that have a tangible impact on everyone’s wallets.
Per-capita GDP is the per-person average share of the country’s economic output — essentially a measure of our standard of living. Productivity is not about how many hours or how hard people work. It’s about how much wealth is created by each worker, affected by factors like business investment, employee training and taxation.
Overall GDP has been growing a bit the last couple of years amid a population surge driven by record immigration levels, the new Canadians having to at least buy the necessities of life. But the per-person share of GDP fell for
six consecutive quarters
recently in Canada, before recovering ever so slightly the last quarter. Two quarters of negative growth overall is considered a recession. We might not technically be in one but on a personal level we are,
say many economists
.
The reason for that plummeting per-capita GDP lies chiefly with “dismal” rates of productivity. Canada has to address that problem, economists say, or fall toward the bottom of the list of industrialized nations and particularly struggle to cope with American protectionism.
“If we had higher productivity in the core of our economy, higher per-capita GDP … we would have a more resilient economy — and today is when we need more resilience,” said Poloz, now a special advisor to the Osler law firm.
And yet, as politicians campaigning for the April 28 federal election evoke nationalistic sentiments and feisty hockey catch phrases in response to Trump’s tariffs, they’ve been less vocal about maladies that started sickening the Canadian economy long before the latest trade war.
“Right now in the political debate, it’s still not that much at the forefront,” said Paul Beaudry, a University of British Columbia economics professor and former Bank of Canada deputy governor. “What we’re hearing about the most is very much deficit-financed tax cuts. It’s unlikely that by itself is going to make us more innovative.”
No one suggests solving the problems will be easy for whichever party forms the government. But economists and business leaders say there are policies that could supercharge Canada’s sluggish economy.
Governments, they say, ought to provide incentives to encourage investing in Canadian business, while trimming regulation and streamlining bureaucracies that “crowd out” private economic activity. The kind of innovation that produces industrial heavyweights has to be championed more. Worker training needs to better fit the economy’s needs, while the skills immigrants bring with them should be better exploited. Inter-provincial trade barriers must be knocked down.
“We have to make it easier for businesses to do business,” said Pascal Chan, a vice president of the Canadian Chamber of Commerce.
The emphasis is on goosing the private sector, a potentially controversial strategy. But economists stress that more productive companies hire more people, pay them fatter wages on average and generate additional tax revenue to fund social programs and the like.
The issue may not be front and centre in an election focused on Trump’s foreign and trade policy, but the parties have given at least some attention to the productivity question.
The Conservatives announced a major tax break for those who invest in Canadian business, and constantly highlight a “lost Liberal decade” of poor economic performance. Liberal Leader Mark Carney has said productivity must be improved and promised to provide various tax and other incentives. The New Democratic Party actually criticizes the pursuit of “so-called productivity” and promises to focus government procurement on unionized, Canadian workers.
Whatever the solutions, the indicators of economic peril are stark.
Canada’s per person GDP was 82 per cent of the U.S. number in 2002. It slumped to 72 per cent in 2022. By then, per-capita GDP in the U.S. was almost US $64,000 — $18,000 more than in Canada.
But this country has been slipping in comparison to most other developed nations, too, falling from $3,000 above the average of Organization of Economic Cooperation and Development (OECD) members in 2002 to slightly below the OECD average by 2022.
Canada used to be on par with Australia, yet fell to $4,000 behind it by 2022.
The future looks even less pretty, a
Fraser Institute report
noted last year. OECD analysts have projected that if current trends continue, Canadians’ income — as measured by GDP — would reach $63,000 per person by 2060, compared to $94,000 in the U.S.
The grim numbers parallel slumping investment in tools like artificial-intelligence, machinery, training and intellectual property — things that make workers more productive. Investment per worker was only about $14,000 by the second quarter of 2024, down from a peak of $18,000 in 2014, noted the
C.D. Howe Institute
in a report last September.
Meanwhile, Canadian investors often send their money abroad instead of here. Canadians own a trillion dollars of assets in the United States — more than Americans have ploughed into our economy, said Poloz.
Research and development has also shrunk to half the rate in the United States, noted TD Bank economist Marc Ercolao in
a 2023 report
.
“You’ve seen those signs that say, ‘In emergency, break glass?’” said Bank of Canada deputy governor Carolyn Rogers in an oft-quoted speech a year ago. “Well, it’s time to break the glass.”
Of course, wealth and related figures don’t tell the whole story.
While per-capita GDP may be as high in Alabama as in Canada, wealth is distributed more evenly here than in the U.S., noted Nobel-winning American economist Paul Krugman in
a recent essay
. Canadians report being more satisfied with life than Americans and, armed with programs like universal health care, live three years longer than their U.S. cousins on average — and a whopping decade longer than Alabamians.
But even Krugman acknowledges that Canada’s economy has been “underperforming,” while countries with a similar income spread and social-safety net are pulling ahead.
There’s no one answer to how the country landed in this predicament, experts say.
Lack of investment is clearly a big part of the equation. GDP growth often stems from smaller companies that have innovative ideas and “suddenly have hockey-stick growth,” says Poloz. Yet 95 per cent of firms in the small to mid-cap phase are turned down for financing in a country with limited venture capitalism, he said. Which means promising young Canadian enterprises tend to get snapped up by Americans, depriving this country of their future wealth.
“We don’t go around praising innovation especially,” says the UBC’s Beaudry. “You have to want to be, and to celebrate, the innovators.”
Then there’s the swelling size of the public sector. Since the Liberals were elected in 2015, the federal workforce has increased
by over 100,000
— more than double the overall population growth. The public sector made up 13 per cent of the economy in 2015. Now it’s 16 per cent, says Poloz.
When the government sector expands at a time of slow industrial growth, the public side tends to “crowd out” in economic terms the businesses that generate wealth, he said.
In all, Canadians shouldn’t get too obsessed with the shrinking per-capita GDP over the last couple of years as immigration expanded the population — the problem has been with us for much longer, says Beaudry.
“Productivity hasn’t been growing very fast for 30 years,” said the UBC economist. “That, we should be worried about.”
Policy proposals that could potentially spur on private-sector productivity and halt Canada’s sliding per-capita GDP
Liberals
- Cut municipal development charges and reduce “housing bureaucracy, zoning restrictions and other red tape” to encourage more home building;
- Cap size of federal workforce and review government spending to “spend less and invest more”;
- Build a “trade diversification corridor” to build transportation infrastructure to facilitate international trade;
- Eliminate the GST for first-time homebuyers on homes of $1 million or less;
- Cut the lowest tax rate by one per cent, saving a two-income family up to $825;
- Cancel the consumer carbon tax;
- Fund increased food-processing capacity, help farmers reach new markets and buy more efficient machinery and other measures to boost the agriculture sector;
“If we’re going to keep our people safe, if we’re going to meet our social obligations we’re going to have to be more productive.” — Liberal Leader Mark Carney, November 2024
Conservatives
- Exempt individuals and companies from capital-gains tax when they re-invest those gains in Canadian businesses;
Increase funding for harbours to encourage growth in the fishing industry;
- Open the door to more oil and gas production in Newfoundand and Labrador and Western Canada;
- Create a “national energy corridor” to fast-track approvals of transmission lines, railway, pipelines and other infrastructure for moving energy resources;
- Exempt all buyers from GST on homes up to $1.3 million;
- Tie infrastructure funding to provinces on growth in housing;
- Cut the lowest income tax bracket to save those taxpayers $900 each per year.
- Cancel the consumer and industrial carbon tax;
- Slash the number of federal bureaucrats and otherwise cut federal spending.
“During the lost Liberal decade of higher taxes and … paycheque-killing anti-resource project radicalism, Canada’s GDP has slumped to the worst growth in the G7 and half a trillion dollars worth of investment has fled Canada for the U.S.” — Conservative campaign statement
NDP
- Increase the minimum income on which tax is applied, saving families over $500 a year;
- Ban American companies from federal procurement contracts while tariffs in force;
- Permanently favour unionized and Canadian companies in government procurement;
- Incentivize value-added processing and manufacturing in Canada, reducing the country’s reliance on exporting raw materials to the U.S.
“Decades of Liberal and Conservative governments have hollowed out our economy, chasing GDP growth and so-called productivity while handing billions to corporations and letting good jobs disappear.” — NDP candidate Matt Green (Hamilton Centre)
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