Mid-year economic check-up: assessing the outlook

Anne McLellan and Lisa Raitt

Just over six months ago, when we released our second annual scorecard of key metrics for Canada’s economy, we expressed concern about persistent weakness that was threatening to undermine our future prosperity. We called for urgency from policy makers.

Since then, our worries have only become heightened – both about the outlook and the policy response.

On the most important measures of living standards – output per capita, labour productivity and equality –we’re going in the wrong direction. As far as policy goes, we’ve seen some key steps toward boosting green investment, but we’re still waiting on the government to execute its plan. We’ve also noticed some emerging policy red flags that are a source of additional concerns. 

First, let’s look at some of the key economic metrics.

GDP and Productivity

On a per capita basis, our economy has not only stalled but is contracting. Real GDP per capita has fallen over the past year faster than at any time in at least six decades outside of a recession, and we are producing less per person today than we were in 2018.

This is not just a distortion in the numbers created by the recent surge in population.

Labour productivity, the amount of output generated per hour worked, looks even worse.  That metric has fallen in 11 of the last 12 quarters, and productivity numbers in the first half of this year are below what they were in the final six months of 2014. If things don’t change fast, we’ll soon be talking about a lost decade of productivity.

Productivity data can seem obscure but it’s a vitally important metric for gauging a nation's potential economic prosperity. It acts as a speed limit for the economy and a speed limit for wages and incomes. The less productive we are, the less competitive our businesses will be. And if our businesses are uncompetitive, they will have less ability to pay higher wages.

For example, we’ve seen wages rapidly catch up over the past year as the labour market tightened, which has helped workers offset the bulk of the cost-of-living increases over the past two years. This is fundamentally a good thing.

But it’s easy to predict that those wage gains will quickly fade because of our weak productivity numbers.

Adding to concerns over economic fundamentals are data that show recent gains in social outcomes have also stalled in the face of higher inflation and higher interest rates.

Poverty rates are rising for the first time since 2015. Young families and low-income earners are being hit hardest by higher borrowing costs and rising costs of living. The recent deterioration we’ve seen in the labour market has been felt most by recent immigrants and visible minorities, who have seen their unemployment rate go up a full percentage point over the past year – double the national average.

Pivotal Point

The outlook, meanwhile, is hazy. We will no longer be able to rely on cheap money to drive growth, like we have for much of the past two decades. In fact, the past drivers of growth will become outright drags in the coming years. The excesses of the past that have led to high household debt levels (among the highest anywhere) and out-of-reach housing prices will now act as headwinds. Governments, too, will face higher debt burdens that will limit the state’s ability to fuel growth.

Our resources continue to do much of the heavy lifting for our economy.

Since the pandemic, we have become more reliant on raw resource exports, not less. Direct exports of fossil fuels – oil, gas and refined petroleum – generated $170 billion in export receipts over the past 12 months, or more than 20 per cent of total shipments abroad.

But business as usual is no longer viable here either. We need to hurry toward a less carbon-intensive economy and it’s going to be expensive.

Investment

We’re not trying to paint a bleak picture. All we want to do is highlight the challenges so that we can identify ways forward. Look long enough at the numbers and it becomes pretty clear that in a world where consumers and government are increasingly limited drivers of growth and productivity is lagging, business will need to step in.

Let’s not underestimate the task at hand. Anemic private-sector investment has been the Achilles heel of the nation’s economy for years and one of the primary reasons we are falling behind on productivity. All this at a time when borrowing costs were cheap. That’s changed, too,  making the investment environment even more challenging.

The good news is that we are seeing some evidence that businesses – that are in relatively good financial shape still -- are slowly beginning to step up. In the first half of this year, we saw non-residential business investment rise by an annualized 8 per cent - solid growth that is much stronger than the economy as a whole. There are even signs of a rebound in manufacturing investment, a welcome development.

We must double down on our collective efforts to figure out ways to continue supporting this upward trend in investment, or else we’ll be in trouble. This brings us to policy.

Policy

At the Coalition, we talk about the need for Canada to have a long-term plan for economic growth that is inclusive and sustainable. The emphasis is on long-term.

We represent a diverse group of Canadian leaders and organizations – from business, labour and civil society – who are united by the idea that economic growth is a necessary precondition for job creation, rising incomes, more social equity, a cleaner environment, and a better quality of life.

We avoid advocating for specific policy proposals and taking sides in debates since we understand there are competing potential paths toward achieving our objective.

But there are certain core principles we think make a lot of sense. For one, we believe too much of a focus on short-term results or decisions driven by immediate political expediency threatens the outlook. Second, a corollary of the first is that Canada needs to develop an investment-first mindset as the best way to solve the big challenges and boost living standards.

That’s a pretty good lens through which to look at policy because it provides some reasonable yardsticks for decision-making. Here are a few examples.

Climate Transition

Let’s not be too cavalier about how we think about and deal with our resource sector. Without those exports, our dollar would be weaker, and inflation and interest rates would be higher. Without oil and gas, we’d all be poorer.

This means it’s critically important we get this transition right as a resource-producing nation.

To be sure, we need to quicken the pace of greening our economy. Achieving net zero by 2050 is one of the core beliefs of the Coalition, and the data show we’ve made some progress.

According to the latest government data available, Canada’s greenhouse gas emissions were 670 megatonnes of carbon dioxide equivalent in 2021, down 53 megatonnes from 2019 levels. The decline was driven by lower emissions intensity.

But there’s a long way to go, and there are forecasts that emissions actually rose again in 2022 in part due to energy production. The only way we’ll be able to reconcile a healthy resource sector with our climate transition goals will be through accelerating the pace of private sector investment in green technologies and infrastructure.

While the federal government can use its balance sheet to help make the economics of climate transition work, there will be limits to how much it can help amid competing demands for taxpayer dollars in a rising interest rate world. Businesses will need to step up and government will need to find ways to make the calculus work.

We welcomed the series of tax measures in this year’s budget to incentivize green investment, but the tough part is still to come.

For one, the Canadian government has yet to provide certainty for industry around carbon pricing, and its pledge to streamline regulatory approval procedures —a necessary condition to hit the climate targets – is still apparently a work in progress. 

Investment Conditions

If we want corporations to ramp up capital spending in coming years – in the order of hundreds of billions -- the Canadian government will need to provide and foster a stable investment environment. That means efforts to reduce risk, or co-financing projects or providing other forms of cost certainty.

It will require a unity of purpose across parties on, at the very least, core objectives even if we don’t agree on specific policies. And even as we debate specific policy tools, decision-makers need to be cognizant of creating unneeded uncertainty that could put a chill on investment. Government change shouldn’t alter the economics of billion-dollar investments.

To provide stability, we also need to make sure indigenous communities are part of the equation both for the private sector and governments at all levels.

A strong investment environment also means seeing corporate Canada as a partner, not a problem. We hear from our members that they are concerned about policy being drawn up for short-term political imperatives that appear to be far from the best solutions to our economic problems. This includes policies against specific industries that undermine the efficiency of the tax system or sudden changes to business legislation without meaningful consultations.

We should also stop demonizing profits, which is becoming uncomfortably mainstream. We will need healthy, profitable companies to drive the expansion of investment needed to drive up living standards. 

Macroeconomics

We also need to get macroeconomic policy right. The best type of environments for business investment are the ones where policy achieves low and stable inflation.

To get inflation low and stable will require two things. One, fiscal policy needs to work in concert with monetary policy. They can’t work at cross purposes. Two, we need an independent central bank that is sheltered from political gamesmanship.

Closing

At our Coalition, which represents 142 member organizations, we know there are no easy answers. The problems are multi-faceted and longstanding. And Canada also has a lot going for it right now. We can't lose sight of the fact that we are a rich, prosperous nation that does a lot right.

But we also believe we can do better, which is why we keep score through 21 internationally recognized metrics. We are closely monitoring the numbers and will provide updates on Canada's progress in the coming months as we lead up to the release of the full scorecard early next year.

We refuse to accept that slow growth is inevitable.