It's not just ripples from the global financial crisis that are weighing on growth. Blame baby boomers, too, who are squirrelling away savings and putting their cash into houses instead of doing what they've done for decades: Driving the country's economic activity.
As a result of the aging population, the new normal for economic growth looks to be slower than in the past, Bank of Canada Governor Stephen Poloz said in a speech Tuesday, with interest rates likely to be lower for longer.
"The demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend," he told the Halifax Chamber of Commerce. That will also mean lower interest rates "than we are used to," he added.
He looked at why economic activity in both Canada and around the world has been so lacklustre since the financial crisis, pointing to the nasty "hangover" of the global downturn. In the long run, though, it is the aging population that will dampen growth and put pressure on productivity.
That's partly because an aging population tends to save more – rather than spend – to build wealth as people approach retirement. Many of those savings are going into homes, which does little to boost productivity, compared with more productive uses such as business investment.
Canada is already seeing the impact of a boomer generation that's exiting the work force, and the central bank expects that by next year, labour's contribution to the potential growth of the economy will be half what it was in 2007. "That's the labour story, in a nutshell, and it is slowing us down."
In the near term, first-quarter economic growth "will be on the soft side," Mr. Poloz said, weakness that's likely partly due to the weather. Core inflation has ticked higher in recent months, although looking past the monthly volatility, consumer prices appear to be running at about 1.2 per cent.
He also said the possibility of secular stagnation – where economies perform well below normal for a long period of time with persistently weak labour markets – "needs to be taken seriously."
The tone of his language showed no rate hikes are on the horizon. In fact, "interest rates may remain lower than we have experienced in the past for a longer period, until some of these long-term forces dissipate," he said. The message "reiterates the theme 'lower rates for longer,'" said Sébastien Lavoie, assistant chief economist at Laurentian Bank of Canada.
The Canadian dollar weakened after the speech, shedding about two-thirds of a cent to close at 89.79 cents (U.S.). At a press conference after the speech, Mr. Poloz said the economy hasn't seen much of an impact from the weaker dollar yet, reiterating that a pickup in the U.S. economy will have a far greater effect.
He characterized the postrecession period as one of "prolonged lacklustre economic growth," both in Canada and around the world, with the global economy growing at only two-thirds of the pace registered in the four years before the downturn.
Still, he called the improvement in productivity in Canada in the second half of last year "very promising." He added that momentum is building in the United States, which will help exports and alleviate uncertainty, which in turn should help investments.