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Canada’s economic growth: is this as good as it gets?

Glen Hodgson
Senior Fellow

This article originally appeared in the Globe and Mail on August 9, 2017.

The Canadian economy is finally performing well after two years of mediocrity. Economic growth is much more positive and widespread. Jobs are being created across much of the economy and unemployment has fallen. Canadians should enjoy this level of performance while it lasts – since there are many reasons why it won’t last.

First, the good news. The Conference Board of Canada recently raised its 2017 growth forecast for the Canadian economy to 2.6 per cent, which the IMF corroborated by raising its own 2017 forecast for Canada. Statistics Canada just reported second-quarter growth of 4.6 per cent annualized, and the economy has expanded by 4 per cent since this time last year. The Alberta economy has rebounded sharply, while growth in British Columbia, Ontario, Quebec and most other provinces remains solid. Newfoundland and Labrador is the exception, with the provincial economy expected to contract for a second consecutive year.

As growth picks up, North America is shifting into a rising-interest-rate environment, with the Bank of Canada recently raising its key interest rate. A turn toward more normal monetary conditions is a healthy sign, since it means the economy is now able to stand and grow on its own legs. The long, exceptional period of dependence on what we have called “financial morphine” is coming to an end.

Now for the “sober economist” part. There are numerous signs that things are not quite as good as they seem. Economic realism needs to be applied in the thinking, planning and operations of business and government.

Start with Canadian private investment. Growth has been feeble for most of the past five years, and has contracted for the past two years. This reality is a terrible sign for long-term productivity growth and competitiveness. Without a bounce in private investment, the consumer and government spending can carry the economy for only so long. The Conference Board expects modest growth in private investment in 2017, but business confidence is not robust and there is little strong private investment rebound in sight.

Commodity prices have increased slightly, but there are few expectations of a sharp improvement. With ample new global oil supply from the United States, Russia and OPEC members ready to come on stream, oil prices in particular seem to be range-bound around $50 (U.S.) a barrel. A slow recovery in commodity prices will continue to be a drag on resource-sector investment.

Furthermore, the external environment is not as supportive as hoped. The U.S. growth forecast is less robust than initially projected. Because of a growing realization that there will be no Trump growth miracle, combined with rising interest rates in Canada, the loonie has climbed by 10 per cent against the greenback. While the currency movement is good for consumers, it dampens export growth to the United States.

There are also sticks in the spokes of international trade and investment. The successful Comprehensive Economic and Trade Agreement with the European Union is a reason to feel more confident about new, more diversified trade opportunities. But the coming North American free-trade agreement negotiations, and the protectionist attitude of the Trump administration, add uncertainty for many Canadian exporters. Will we be able to maintain and even improve market access to the United States? The answer is “wait and see,” which is hardly good for business confidence.

In addition to current frictions, structural forces are at play. Long-term potential growth has faded to around 2 per cent annually in Canada. Demographics are the key factor, since an aging population means much slower labour-force growth. We project the Canadian labour force to grow at about 0.5 per cent annually in the coming decade, half the rate experienced in the past. Potential growth is also declining in the United States, China and many other major economics.

An active immigration policy in Canada can help to replenish the work force, but even 250,000 skilled immigrants a year can’t fill all the expected holes in the labour market. Stronger productivity growth would also help offset negative demographic forces, but Canada’s track record is dismal. Moreover, the transition to a low-carbon economy has begun globally; Canadian policy makers and businesses are at an early stage of reducing greenhouse gas emissions without impairing economic growth.

All of these current and structural factors point to a slower-growth world in 2018 and in the decades ahead. Canadians should enjoy a robust 2017 economy as a 150th birthday present – since this is as good as it gets.

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