This Op-Ed was originally published by The Hill Times on January 27th, 2020. It is written by Pedro Antunes, Chief Economist.
Canada just entered a new decade in 2020, but there are several unsolved challenges that we’ll have to deal with over the coming years. Reducing greenhouse gas emissions and adapting to climate change are key concerns; an aging population will pressure health care and labour markets, stresses that have already become evident across Canada; and, issues hindering private investment, such as tax competitiveness or market access, need to be addressed.
The external landscape is also challenging, especially as the United States and China are, one day, working toward a trade deal, or the next day, ramping up the tariff war—with either outcome likely hurtful for Canada’s own trade prospects. With so many challenges, what might Canada’s leaders keep top of mind about the economic landscape this year?
Housing Markets Heating up, Again
In recent years, concern over quickly rising home prices, especially in Vancouver and Toronto, led policy-makers to implement measures with the hope of increasing affordability for Canadian buyers. Foreign buyer taxes imposed in Vancouver and the GTA and several rounds of tightening mortgage rules eventually had an impact, helping prices ease and then stabilize. But home prices are set to rise once again in many urban areas (with near-term exceptions likely for Albertan and Saskatchewan cities). Exceptional job gains last year coupled with booming immigration is boosting demand for housing—driving up sales-to-listings ratios to peak levels in many major cities across Canada—a key indicator of future price acceleration.
Housing affordability is a tough issue to resolve. No one wants to fix the problem by hurting demand to the point where prices decline significantly. After all, nearly 63 per cent of Canadian families own their home, and so are relatively “hedged” against price increase. Affordability remains a challenge for first time homebuyers. Stimulating new development in the big markets is an obvious outlet. Policy-makers could also encourage Canadians, and new immigrants, to look for opportunities in smaller cities, where labour markets are often tighter and home prices lower than in the major centres.
A Challenging Global Environment
The global economy posted a subpar performance in 2019, largely due to rising protectionist policies and geopolitical risks that hurt investment and trade. The recent trade agreement between the United States and China (the world’s two largest economies, and Canada’s two largest export markets), should lend to a better performance this year. Still, for Canadian exporters, the situation will continue to be difficult. Chinese trade restrictions on Canadian canola, soybeans, and peas remain in place while agri-food and other Canadian exports to China will likely be displaced under the new U.S.–China deal that saw China commit to significantly growing its imports of U.S. products.
The situation is also dire for those seeking to export south, to the United States. Over the last few years, our closest ally and biggest trade partner forced the dissolution of NAFTA, imposed tariffs on lumber, steel, and aluminum and has threatened further trade sanctions against Canada (and other allies). It’s no wonder that investors are rattled and nervous about adding export capacity here in Canada—private investment in manufacturing, technology and retooling is at historic lows and it’s unlikely that the ratification of the Canada-U.S.-Mexico trade deal will boost investment significantly.
Canada needs to continue to diversify its trade. Recent trade deals such as the CETA with Europe and the CPTPP with Asia-Pacific countries will lower tariffs and open opportunities, but Canadian exporters need to be informed and supported to help them reach these markets.
Lack of Workers will Hold Back Growth
Many developed economies are feeling the pinch of labour constraints and Canada is no exception. In 2019, Canada’s unemployment rate averaged a record low of 5.7 per cent, job vacancies swelled to 563,000 (in the third quarter) and average wages soared by an estimated 4.7 per cent—2.8 percentage points above inflation! While the situation is favorable for workers, the pendulum has swung too far. The challenges employers are facing finding workers will hold back economic growth and, for some firms, discourage investment.
Solutions and Challenges are Intertwined
Immigration is a clear solution to Canada’s labour market needs, but it comes with its own challenges. Immigrants overwhelmingly settle in Canada’s major cities, creating a challenge for municipal governments dealing with overheated housing markets and strained demand for public services and infrastructure. Several immigration programs to promote settlement and retention outside the major cities are underway—hopefully they’ll prove effective as immigration levels are set to ratchet up this year and next.
Getting more Canadians in the workforce would also help. Lifting the participation rates of women, Indigenous peoples, and persons with disabilities would benefit those underrepresented groups and help alleviate job vacancies. Improving educational outcomes of Indigenous youths, investments in workplace mobility and expanding daycare would be impactful and need to be incorporated in our economic development strategies. Still, progress on these fronts will take time.
Investing and adopting labour saving technology is another important factor that would offer a wide range of benefits. While technology will undoubtedly displace some workers, it also promises to increase the economic pie. If the increased income is used to retrain and compensate workers that lose their jobs, then everyone is better off. However, even if a tighter labour market should provide Canadian businesses the incentive to invest in productivity-enhancing technologies, the pace of adoption remains slow in Canada.
Most forecasts are calling for rather muted economic growth in Canada this year—not surprising for an economy that is underinvesting in productive capital and has run out of excess workers. To improve our path forward, we need to do more with the workers we have, and we need to revive private investment in Canada.
Comments