Solving the productivity puzzle is our most urgent challenge

TORONTO—The latest World Economic Outlook from the International Monetary Fund shows the Canadian economy on a clear downward track. Economic growth, which came in at five per cent in 2021 and 3.4 per cent last year, is projected to rise only 1.7 per cent this year and an even lower 1.4 per cent next year. This should focus the minds of the new Trudeau cabinet. Without better economic performance, we cannot advance what might be called the Canadian dream of individual opportunity for advancement and an inclusive society of high-quality public services, starting with education and health. In fact, the challenge could be to retain what we have. To be sure, our economy doesn’t operate in isolation from what is going on in the rest of the world, and especially in the United States. Global growth has fallen from 6.3 per cent in 2021 and 3.5 per cent in 2022, to a projected three per cent for this year and next. U.S. growth fell from 5.9 per cent in 2021 and 2.1 per cent last year to a projected 1.8 per cent this year and 1.0 per cent in 2024. The rise in inflation and the decision to fight it by significant increases in interest rates is a major factor in slowing growth. But not the only one. High levels of public and private debt are becoming a growing burden. According to the United Nations, public sector debt worldwide reached a record US$92-trillion last year. The subsidy war launched by the United States to attract investment at the expense of other countries—including Canada—along with the misguided pursuit of “friend-shoring” which will raise the cost of many products through new and more costly supply chains will damage economic prospects. The risks of financial instability driven by high levels of private debt in rich nations and by unsustainable levels of public debt in low-income countries, the geopolitics of the U.S.-led Cold War against China, the cost of the Russia-Ukraine war including pressures for major increase in non-productive defence spending, and the growing urgency of addressing climate change—including a costly transition to new energy systems—are other factors affecting the economic outlook both around the world and here at home. They are what the IMF calls “downside risks” to future growth prospects. But there is another issue, which reflects Canada's failure to address underlying structural problems in the country. This is summarized in our weak productivity growth, and consequently a potential growth rate that is too low for a healthy economy in the future, one where we are able to afford to do the things we would like to do, let alone sustain existing programs as society ages. The potential growth rate is the rate of growth that can be sustained without triggering higher rates of inflation and the need for anti-inflation programmes such as higher interest rates and curbs of government spending. Some of this is set out in a recent report from TD Economics: Mind the Gap: Canada is Falling Behind the Standard of Living Curve. It spells out a disturbing picture of our recent economic performance, arguing that we have only appeared to be doing well because of the growth coming from a population increase driven largely by immigration, and a commensurate increase in hours worked. Without immigration, we would be worse off. The reality is that “in recent years, Canada has lagged behind the U.S. and other advanced economies in terms of standard of living performance (or real GDP per capita).” And the reason is poor productivity performance. As TD economist Marc Ercolao writes, “economic growth does not necessarily equate to economic prosperity.” The size and growth of the economy is one thing, but standard of living is another—the growing economy has to be divided by a rising population. And when that is done, our economic performance looks much less impressive. In fact, it looks quite discouraging. And this performance has been worsening since the pandemic. In fact, “since the 2014-15 oil shock, Canada’s performance has gone from bad to worse. Canadian real GDP per capita has grown at an average rate of only 0.4 per cent annually, paling in comparison to the advanced economy average of 1.4 per cent,” Ercolao writes. And the underlying reason is poor productivity performance which has plagued Canada for many years despite some efforts to address it. There are many explanations. Canadian businesses underinvest in machinery and equipment compared to other leading industrial economies. Yet technology adoption is a key factor in productivity performance. Our businesses also underinvest in research, development and other intangible assets, contributing to an innovation gap. In fact, R&D spending by Canadian business has been in decline, as a share of GDP, for about 20 years while in most competitor countries it has been rising. As well, Canada has a relatively large concentration of small companies. As Ercolao points out, “firms of smaller scale tend to export and invest less than their larger counterparts.” We don’t have many large anchor firms that are Canadian and which can provide leadership for innovation and growth. Our lax foreign takeover rules enable the acquisition of high-growth-potential firms by multinationals so that their scaling-up potential for Canada is never realized. With the July 26 cabinet shuffle, we now have a new government. But it is far from certain that it will do a better job than the pre-shuffle team in putting Canada on a better path. This is not just a Canadian problem. U.K. Labour Party leader Keir Starmer—potentially Britain’s next prime minister—said that his priorities would be to prioritize economic growth, wealth creation, investment and entrepreneurship. This, he said, “is the only game in town for those who dream of a brighter future.” Productivity, clearly, is the first step. But the benefits of productivity growth are not automatically shared so that measures for better distribution of these gains to avert the inequalities we find in society also matter. But solving the productivity puzzle is the most urgent challenge. David Crane can be reached at crane@interlog.com The Hill Times

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Solving the productivity puzzle is our most urgent challenge

Without better economic performance, we can't advance the Canadian dream of individual opportunity for advancement and an inclusive society of high-quality public services. In fact, the challenge could be to retain what we have.

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