Canada lags behind the developed economies in terms of the standard of living of its population, which, moreover, has been steadily deteriorating since 2014. We are talking here about an index – real GDP per capita – whose anemic growth condemns Canada to rank last among the members of the Organization for Economic Co-operation and Development (OECD). If the denominator, swollen by a now wide-open door to immigration, only partially explains this drop, is it an inappropriate response to the chronic weakness of the numerator?
In his published Canadian reading in March, the OECD summarized that population growth, supported by high levels of immigration, will continue to be an important driver of economic growth in the years to come. But the long-term improvement in the standard of living calls instead for higher productivity. “Low productivity growth since 2015 has led to widening GDP per capita gaps between Canada and better-performing economies. »
Thus, unbridled immigration is only a temporary remedy for the labor shortage and only one counterpoint among others to the aging of the population. For a fundamental structuring contribution and for the longer term, it would be rather welcome to remedy years of weak investment and productivity growth.
In other words, an increase in GDP, even boosted by exceptionally strong population growth, does not necessarily go hand in hand with an increase in the standard of living. Especially since “adding people to the population is not without cost, especially when it is done quickly”, recalls the Conference Board of Canada, which mentions in particular its effect on the residential real estate market, but also on inflation and on public services. “While newcomers are a welcome addition to the labor supply, they also increase overall demand,” he adds.
Anemic growth in GDP per capita
In his study Working hard or working too hard?, Desjardins Group returns to this growth in real GDP per capita below the average of advanced economies to add that the gap has widened gradually, but steadily since 2014. »
Population growth is not the only factor in question. A more modest increase in productivity per hour worked (or labor productivity) is also part of the explanation. Added to the equation is a composition of economic activity now based more on industries that are less capital intensive and have experienced minimal or even negative productivity growth. In short, “economic activity has shifted towards sectors with more limited productivity gains. More specifically, it mainly increased in public services from 2015 onwards.
Not to mention the lack of investment in non-residential structures, machinery and equipment and intellectual property, which has been rather lackluster since 2015. “The use of these inputs makes the workforce more efficient,” explains economist Marc Ercolao, from TD. He adds that the problem can also be attributed to the perpetual decline in research and development spending over the past two decades. And that we should also remember the relatively high concentration of small businesses in Canada in production and employment, with smaller businesses tending to export and invest less than their larger counterparts.
From a mathematical point of view, there is therefore a mismatch between the progression of the numerator and that of a denominator whose growth, under the effect of supercharged immigration, amplifies the phenomenon of erosion of the standard of living observed in Canada, we can deduce.
Moreover, at TD, we note that Canada’s delay in terms of GDP per capita is not new, but that it has worsened since the pandemic. “The Canadian workforce is currently growing at an historic rate of 3% (on an annual basis), but this is a very recent development. Average population growth since 2020 (1.2%) is just a hair above its pre-2000 rate […] In contrast, real GDP growth has been on a downward trend since the 1980s.”
Marc Ercolao explains that in the pre-pandemic decade, Canada matched the United States in average growth at just over 2% per year, and stayed above the G7 average of 1.4%. And in the post-pandemic years, Canada has recorded the second-fastest average expansion, with a key driver of outperformance having been the country’s trend toward strong population gains.
But when we adjust it to take this demographic variable into account, we can see a deterioration in Canada’s real GDP per capita. “In the early 1980s, Canada enjoyed an advantage over the advanced economy average of nearly US$4,000 while remaining fairly close to the level of US estimates. By 2000, this advantage had all but evaporated, and US GDP per capita had outstripped Canada’s by more than US$8,000. […] Since the oil shock of 2014-2015, Canada’s performance has gone from bad to worse, with real GDP per capita growing at a meager rate of just 0.4% per year, compared to an average of 1.4% for so-called advanced economies. »
We can therefore conclude that the Canadian economy has masked its persistent productivity problems by growth, described as unsustainable, fueled by the addition of workers.
Unfortunately, without fundamental shifts, little recovery in Canada’s standard of living seems to be on the horizon. “The OECD predicts that Canada will rank dead last among OECD members for growth in real GDP per capita until 2060,” highlights the TD economist.