Canada has quietly slipped into a world of mediocre real economic growth of around 2 per cent annually. Year after year, since the initial recovery from the 2008-09 global recession, the Conference Board of Canada has anticipated conditions for more robust growth in the coming year – only to see that growth trickle away. The outlook for 2015 is no different; what looked like a strong year last fall has dissipated with the collapse of oil prices and the significant negative impact on oil patch revenues, profits, investment and jobs. We are now forecasting 2015 growth for Canada of only 1.9 per cent, consistent with the revised outlook from the Bank of Canada.
Let's quickly dispense with why growth matters. Economic growth is how we as a society achieve higher living standards and how we can pay for valued public services, such as health care, education and public infrastructure, without tax increases. Stronger economic growth makes it easier to address income inequality and poverty, if we choose to, since the size of the economic pie is larger. Without economic growth, income distribution becomes a struggle that results in winners and losers.
What's dragging down Canadian growth? Some point to a turbulent and challenging external environment. The global economy has certainly experienced a series of negative shocks over a number of years. Saudi Arabia recently chose to cease being the swing producer for oil, changing its strategy in order to maintain its global market share against new entrants (and at the same time allowing sharply lower prices to penalize oil-producing political opponents like Iran and Russia). The recent oil price shock was unexpected and has hurt Canada as an oil exporter.
There has been other turbulence. The Greek debt crisis erupted in earnest in 2011, repeatedly roiling financial markets in Europe and globally. The Greek crisis is far from over and there are other European public debt crises waiting in the wings, most notably in Italy. In North America, capricious fiscal politics in Washington in 2013 dampened the U.S. recovery by depressing U.S. investor and consumer confidence.
But there are also major forces at play within Canada. Labour force growth is a fundamental part of any country's long-term growth potential, but population aging is weighing on labour force growth as the baby boomers begin to retire. Canadian labour force participation rates have already quietly dropped by two percentage points, slowly dragging down Canada's underlying potential.
Perhaps the kicker is Canada's poor long-term track record on productivity growth (measured most simply as revenue or output per hour worked). Faster productivity growth could, in principle, offset the impact of an aging population and work force, but Canadian productivity growth continues to lag far behind that of the U.S. and many other nations. For two decades, U.S. annual productivity growth has been a full percentage point higher than Canada's. We aren't keeping up with the Joneses next door, let alone the global leaders.
There is no silver bullet for improving a nation's productivity performance. It involves concerted action among governments and business in a number of areas:
– Reducing barriers to growth within the economy;
– Creating better fiscal incentives to work and invest;
– Investing more in human and physical capital, and in public infrastructure;
– Pursuing international trade and investment aggressively;
– Embracing innovation (the constant desire to create value through change) as a core value in all organizations.
On many of these fronts, Canada's commitment is both uneven and unco-ordinated among the three levels of government and with the private sector. We see the results – mediocre economic growth of 2 per cent, in line with our potential but nothing more.
It is highly unrealistic to expect stronger growth performance without changing how we organize ourselves and behave. We could choose to show more initiative, address our weaknesses and drive change, which would improve the outlook. But our track record on reform and innovation suggests that's not the likely option. A more probable economic path ahead for Canada will involve simply learning to live with mediocre growth. Hard decisions will still be required on what we have to sacrifice in order to live within our means. Not a very warm prospect.
Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.
Glen Hodgson