Good times are back (and they're going to get a lot better)
Happy birthday Canada! Your gift is an economy on the cusp of a mini-boom – more jobs, low inflation and rising optimism among businesses. David Parkinson explains how we (finally) shook off the oil shock and got our mojo back
The last time Canada celebrated a landmark birthday – the centennial in 1967 – it was riding one of the great economic booms of its history.
The economy grew at an average real rate of more than 5 per cent annually in the 1950s and 1960s, as the baby boom and leaps in consumer technology kept the foot on the economic accelerator. That growth wave was cresting as the centennial approached, averaging 6.5 per cent in the three years leading up to the big birthday.
Indeed, the government's chief concern in the mid-1960s was that the economy was growing too fast. It was worried about how to keep the party going, without it getting out of hand.
"We can all take satisfaction from the fact that our problems are no longer the problems of overcoming slackness or stagnation, but those of managing growth and prosperity. Our task is to sustain the longest economic expansion in Canadian history," then-finance minister Mitchell Sharp said in his 1966 budget speech.
But by the time Dominion Day, 1967, arrived, the best of that growth was already behind us. The glory days of postwar expansion soon gave way to the tumultuous 1970s, and generally tamer and choppier growth in the ensuing three decades.
Today, as the country turns 150, things look quite different. Slow growth and even stagnation have been recurring themes for the economy ever since the 2008-09 Great Recession, a period of unsteady recovery that, for Canada, was extended by the major setback of the 2014-15 oil shock. With Canada's population growth fading, the huge boomer generation beginning to retire and the country's postwar manufacturing boom an increasingly distant memory, it's unlikely that Canada will ever return to the kind of growth it enjoyed in its younger years. Over the past five decades, the country's economy has matured and, like all mature advanced economies, it has slowed and mellowed. We face relentless challenges to our competitiveness as emerging global whippersnappers nip at our heels.
Still, a national celebration is not typically the time and place to dwell on the obstacles that lie in our future. And while that future looks quite different from how it looked in 1967, there are, nevertheless, some very good reasons to feel optimistic about where the Canadian economy is going.
Among mature economies, Canada finds itself in a better position than most of its advanced-world peers to thrive over the next several years. Over the past 12 months, Canada has boasted the fastest-growing economy in the G7, a mantle it could well maintain over the next 12 months. It has emerged from the oil shock with a more balanced economy poised for healthier, more broad-based growth.
And despite the regular laments about the country's loss of competitiveness in global markets, Canada possesses enviable attributes that should give it a leg up on many of its peers in sustaining growth and prosperity over the next several years.
"I think there is a lot of cause for optimism," says Elyse Allan, president and CEO of General Electric Co.'s Canadian unit, a manufacturing and technology giant that employs more than 7,000 people here. "I think we have a lot of the fundamentals that are so important. The question is, do we continue to sustain those? I bet we do."
"I'm very optimistic. It doesn't mean we don't have challenges, but I think we're very fortunate," says Dominic Barton, managing director of global management consulting firm McKinsey & Co. and chairman of the Advisory Council on Economic Growth, a group of private-sector business and economic experts set up last year to advise the federal government on economic policy. "We've got an incredible endowment that fits with a lot of the longer-term trends in the way the world is going."
The oil shock, the lag, and the upside
One reason to be optimistic about Canada's growth potential over the next couple of years is simple arithmetic. The oil shock effectively put Canada's economic growth on hold for the better part of two years. Now, the country has catching up to do with its global peers, particularly the United States.
The Bank of Canada estimated that the Canadian economy had excess capacity of about 0.75 per cent in the first quarter of the year, representing an amount of economic slack it characterized as "material." That suggests that the economy still has significant room to grow. The U.S. economy, by contrast, is believed to be approaching full capacity – defined by its maximum rate of output achievable without triggering inflation.
One key indication of the gulf in available capacity between the two countries is the difference in their labour markets. The U.S. unemployment rate sits at 4.3 per cent – the lowest is has been in more than 16 years. Experts say that level represents something very close to full employment; they believe there's little room, if any, for it to go lower.
By contrast, Canada's unemployment rate, at 6.6 per cent, is still significantly above its prerecession levels, which hovered around 6 per cent. In effect, Canada is still about 100,000 jobs short of something approaching full employment. Given that the size of the labour force increases by as much as 200,000 annually, the economy would have to add jobs at a pace of 250,000 a year to close that employment gap in the next 24 months; that's about 20 per cent above the pace of job creation over the past 24 months.
Canada is also emerging from the oil shock with more balanced growth than it had before the sector crashed. In 2014, the energy sector, which makes up less than 10 per cent of the national economy, was responsible for 20 per cent of the country's real GDP growth. In the first quarter of this year, when the economy posted a broad-based surge that convinced many economists that it established a solid, sustainable growth track, energy's contribution to GDP growth was roughly in proportion with its share of the economy.
A recent provincial economic forecast from Toronto-Dominion Bank also noted that we're experiencing "a convergence among provincial performances," as Western Canada's oil-producing regions emerge from recession, while fast-growing Ontario and British Columbia are showing more moderate growth. After a violent economic contraction in Alberta and a milder one in Saskatchewan, TD forecasts that each of the 10 provinces will experience real growth in 2018. The country is putting the two-speed economy behind it.
Riding the investment cycle
Growth in business investment was already slowing before the oil shock hit, but it dropped off a cliff in the wake of the oil plunge, which delivered a direct hit to the sector that had been delivering the bulk of the country's capital spending gains prior to the crude crash. But with economic growth picking up, we may be on the cusp of a long-awaited upswing in the cycle for business spending, which tends to mirror the economic cycle.
In the first quarter of this year, business gross-fixed-capital formation – Statistics Canada's measure of business capital investment – surged at an annualized pace of better than 12 per cent, the sharpest in seven years.
And companies indicate they are just getting started. The Bank of Canada's quarterly Business Outlook Survey, released Friday, showed that investment intentions for machinery and equipment over the next 12 months remain near six-year highs.
"Plans to increase spending remain widespread and have become more focused on expanding capacity to accommodate stronger demand," the central bank said.
And for the first time in years, business and government capital investment are aligned – both are poised to increase at the same time. After several years of Ottawa reducing capital spending as the previous Conservative government sought to bring the budget into balance, the current Liberal government has launched an ambitious infrastructure program that should begin hitting its stride this year.
As a result, both private- and public-sector investment will provide fuel for economic growth over the next couple of years.
"With the markets we're dealing with, across the energy sector, [and] with core infrastructure, we continue to see ongoing investment there," says Ms. Allan of GE Canada. "Both in terms of core product and also, now, a real focus on innovation around the digital economy and the industrial Internet – which I think will be so crucial to our competitiveness going forward."
The commodity comeback
What's remarkable is that Canada is embarking on this growth phase with commodities near the bottom of the cycle. The Thomson Reuters/ CoreCommodity CRB commodity index, a measure of 19 energy, mining and agricultural commodities, has only bounced about 10 per cent from its 15-year lows hit early last year, leaving it more than 50 per cent below its post-recession peak. Crude oil is hovering around $45 (U.S.) a barrel, less than half of where it was before the oil shock.
But there is good reason to believe that commodity prices are destined to turn upward. Prices for resources typically rise along with the economic cycle; with global growth improving, the resulting increases in demand will eventually lift commodity prices from their current depths, which will be good news for Canadian producers.
The trickier question is when.
"Commodity prices are low compared to their long-term trend and versus financial assets. However, they can stay low for years – historically, over five years – before reverting to trend," says analyst Antoine Naly of Pavilion Global Markets in Montreal.
One potential catalyst for a rebound could be a weakening of the U.S. dollar. Commodities are priced globally in U.S. currency, so their prices typically move inversely with movements in the greenback. While the U.S. dollar had been relatively strong against global currencies in the months following President Donald Trump's election, it has recently been moderating.
Growing signs that many of the world's key central banks, including Canada's, are inching toward tightening their monetary policy, coupled with hints that the U.S. Federal Reserve may take a bit of a break from its own interest-rate hikes this year, could spell a downward phase for the U.S. buck in favour of other global currencies in the coming months – which would likely give a boost to commodity prices.
For Canada, analysts agree, the key driver will be oil prices, which despite recent setbacks, look to have more upside than downside.
"Oil could do a lot better. At this point, we're looking at the lows," argues Bart Melek, head of commodity strategy at TD Securities. He believes that crude is destined for $60 a barrel by year-end – a level that would be considerably healthier for Canada's big oil sector.
In the longer run, commodity prices could get a lift not only from the projected moderate growth in demand, but by a lack of new supply under development to meet it.
"There has been chronic underinvestment in new capacity across the commodity space," Mr. Melek says – the consequence of the collapse of commodity prices as well as the general slowdown in global business investment in the post-recession period. "The supply side really hasn't done very much, and it won't."
Meanwhile, he notes that even with the slower growth pace in China, which has been the big driver of commodity demand since the turn of the century, it is now growing from a much larger economic base than it was a decade ago. That means even "modest" Chinese growth of 6 to 7 per cent represents significant increases in commodity demand – at a time when there is little new capacity to keep pace.
The population advantage
Of course, Canada is hardly the only country in the G7 with spare capacity and a chance to play catch-up for lost time; it's a common post-recession theme. But what sets Canada apart from its G7 peers is its population potential – a vital ingredient to keeping its economy humming.
While the aging of the baby boomer generation means a dramatic slowdown in the growth of the labour force for all advanced economies, Canada's demographic profile is much less dire than most advanced economies.
Canada's working-age population (15-64) makes up a higher proportion of its overall population than that of any other G7 country. It also has the highest rate of population growth of the group. While the United Nations projects that the populations of Japan, Germany and Italy will be in outright decline within the next decade, Canada's population is still seen growing by nearly 1 per cent annually.
Canada's rate of natural population growth – the difference between births and deaths – is the second-highest in the G7, behind only the rate of the United States. But its real ace in the hole is immigration. Canada's annual intake of immigrants, as a percentage of its population, is more than double the G7 average.
What's more, Canada long ago adopted an immigration approach that puts a premium on work-ready skills – it uses immigration as a means to increase and upgrade its labour force. This year, the country will accept about 300,000 new immigrants, nearly 60 per cent of whom will be selected under economic programs that focus on "their ability to become economically established in Canada," as Immigration, Refugees and Citizenship Canada puts it.
"You want to speak about comparative advantages – Canada gets immigration right better than anyone else," said economist Philip Cross, former chief economic analyst at Statistics Canada. "We moved to an economic and not a family-based immigration system way before everyone else did. Everybody else is now saying, 'Why didn't we think of that?'"
Canada has also been more successful than most of its peers in tapping into its female labour supply. The labour force participation rate among working-age Canadian women, at 75 per cent, is the highest in the G7 and among the highest in the industrialized world. It's another labour advantage that Canada will have over many of its advanced-economy peers as they wrestle with aging populations over the next decade.
"We have an admirable and valuable pool of talent. It's across the country, it's across job types," GE Canada's Ms. Allan says. "Diversified in terms of their capabilities … in terms of the functions we require, in terms of where we require them in the country. We're able to get great talent here. And second, as a global company, it's the ability to access so many culturally diverse people."
"I think that's a real advantage we have."
Putting the pieces together
None of this is to say that Canadians don't still face considerable challenges as the economy emerges from its postrecession funk into a global economic climate that looks quite different from what we faced during the boom that preceded the Great Recession and global financial crisis.
The demographic slowdown in the labour force, while less severe than many other advanced nations face, is nevertheless a major hurdle to growth. Global trade growth remains tepid by prerecession standards; creeping protectionism in many corners of the world – not least in the White House – threatens to further impede trade flows, a big deal for an export-intense economy such as Canada's. The election of Mr. Trump in the United States has created deep policy uncertainties for cross-border businesses. Canada's manufacturing exporters continue to face serious competitive threats.
"The market right now, we call it VUCA: Volatile, uncertain, complex and ambiguous. That's the space we are in now," Ms. Allan says. "I think a lot of companies have realized it's not a temporary state of mind. It is the state of affairs now. The companies that are going to succeed understand that. Their leadership know how to lead and ensure execution in a more ambiguous, uncertain environment."
"I think Canadians have tended to figure things out. We're a very resourceful nation … We have the educated work force, the cultural diversity and leadership across the country that can do it," she says.
Mr. Cross argues that in the past, the key for Canada to shake off slow-growth periods has been the adoption of sounder, more predictable government economic policies. And despite Ottawa's efforts in this regard – with policies such as increased infrastructure investment and a redoubled focus on education, training and innovation – he remains unconvinced that our leadership is getting the policy mix right yet.
"Those people who are in our labour force are going to need the tools to make them more productive," he says. "You also need to innovate. I'm not sure innovation is really something you can design as a government strategy."
"But in the long term, I remain quite optimistic. Over very long periods, our destiny is determined by technological innovation above everything else. And, if anything, I'm more optimistic about the way technology is evolving, and what that implies for our future standard of living."
McKinsey's Mr. Barton points to efforts the federal government has been making, especially in setting up the Infrastructure Bank, as important early steps in setting the stage to sustain Canada's healthier economic growth and innovation in the years ahead.
"It's all lying on the ground; it's like a Lego kit – the parts are all there," Mr. Barton says. "We've just got to put it together."