Craig Alexander has served as chief economist at Deloitte Canada, the Conference Board of Canada and Toronto-Dominion Bank.
In recent months, there has been considerable attention given to the evidence that the standard of living of Canadians is falling. The benchmark reference for this trend is the decline in after-inflation income per person – that is, real GDP per capita. This worrying development reflects still-elevated inflation, weakening economic growth, and strong population gains fuelled by immigration.
This negative trend helps explain why consumer confidence is at levels typically observed during recessions, even though unemployment remains low and the economy has avoided a deep contraction. Simply put, Canadians don’t care about abstract economic growth – they care about the quality of life that they and their families are experiencing. Regrettably, the outlook is grim. The Organization for Economic Co-operation and Development projects that Canada will have the weakest growth in real GDP per capita of any advanced economy out to 2030 – this is unacceptable.
However, the standard-of-living challenge is not isolated to Canada, nor is it simply an economic problem. It has the potential to fuel great upheaval and instability across the world.
The World Bank estimates that between 75 million and 95 million additional people have been pushed into extreme poverty by the pandemic and the inflationary fallout. The International Monetary Fund says global economic growth is expected to decelerate to around 3.1 per cent over the next five years – down from 3.6 per cent before the pandemic and down from 4.9 per cent before the financial crisis in 2008. Three-quarters of the slowdown will come from weaker per-capita growth, with 80 per cent of countries experiencing this trend.
The IMF stresses that the weaker growth in living standards is not primarily because of demographics, but rather is the product of weaker productivity growth and less capital accumulation. There is also a trend toward deglobalization that runs the risk of tempering economic growth, raising consumer prices and keeping interest rates high for longer.
This is important because it can create material political and economic risks. When people don’t feel like they are getting ahead, they demand change. When people are frustrated that they are doing their part in terms of working hard and raising their families, but their expectations of living standards are being disappointed, they lose trust in governments and the economic and financial system.
These feelings become acute when there are perceptions of rising inequality. We saw this after the 2008-09 financial crisis and it helped to fuel the deeply corrosive populism in the world today. The frustration of voters is something that opposition political parties at home and abroad are counting on leveraging in future elections, while governments will try to deflect the exasperation toward domestic businesses or toward foreign governments or firms.
If the IMF forecast is right, their economic outlook is one that could spark considerable political change. In and of itself, there is nothing wrong with the transition of political power – quite the contrary, it can be healthy. The risk is what policies incumbent governments promise voters or what opposition parties pledge to get elected.
Public frustration can result in policies that sound attractive to citizens but are unlikely to address the root cause of the poor growth in living standards. Too often, such initiatives run the risk of making things worse.
The right approach for all countries is to pursue structural reforms, such as: reducing regulatory barriers, fostering more competition in domestic markets, creating incentives for scaling businesses, improving the efficiency of the tax system, investing in infrastructure, better leveraging international trade opportunities and incenting greater private-sector investment. All of these help to boost productivity.
The problem is that such policies often lack public appeal. People think productivity means working harder or producing more with fewer workers. But the reality is that greater productivity is the key to better outcomes for workers and families. Since the end of the Second World War, roughly 80 per cent of the increase in living standards in the advanced economies has come from higher productivity.
While Canada needs to pursue policies to improve growth in domestic living standards, it needs to be mindful that the international slowing of real income per capita growth could lead to greater geopolitical risks that, in turn, might create additional economic risks that Canada must navigate or respond to.
A starting point is to improve foreign relations. For example, Canada is perceived as a country that has shirked its North Atlantic Treaty Organization commitments, there are strained relations with China and India, and relations with the United States are far from ideal. Canada needs to position itself for potential political, economic and financial risks that might arise from weaker growth in global living standards.