Yahoo Finance Canada's productivity is low. What does that actually mean?
When Statistics Canada released the latest gross domestic product (GDP) data at the end of February, the country’s avoidance of a recession during difficult economic times failed to cheer many economists, pundits and business leaders.
Yes, Canada’s real GDP grew by 0.2 per cent in the fourth quarter of 2023, even as the Bank of Canada seeks to keep the economy cool with higher interest rates. But, worried voices warn, a related statistic reveals a serious problem with the country’s productivity — with implications for everything from population to policy to our standard of living.
So, what does it all mean? Should you be worried too?
Understanding real GDP per capita
Real GDP is a measure of the value of goods and services produced in a particular time period — how much wealth the country is producing, essentially. Because it is adjusted for inflation, we can compare one year to the next.
Real GDP per capita divides the real GDP figure by population, telling us how much wealth the average person is producing. If real GDP per capita doesn’t grow over time, it’s a sign that people’s standard of living isn’t improving.
Economists at Canada’s banks pretty much uniformly observed that the country’s real GDP per capita has actually declined in five of the last six quarters, and that the issue extends much further back in time. Put another way, the data suggest our population has been growing quite quickly, but the economy has not kept pace.
Why are we talking about it now?
In part it’s because the issue has become more glaring.
Canada’s recent, unprecedented population growth is exposing weakness in our economic system, Moshe Lander, a senior lecturer in economics at Concordia University, told Yahoo Finance Canada. Population growth should be a good thing, he says, but “it's not being coupled with a significant enough increase in the capital stock to put all of those extra workers to productive use.”
Robert Asselin, senior vice-president for policy at the Business Council of Canada, told Yahoo Finance Canada that as pandemic-era government spending fades, more problems are coming into focus.
“Without wealth creation, wages are stagnant, living standards are affected,” he said. “So it's not an academic debate. It's real and will have a real effect on people's lives.”
Lander notes the problem has actually been growing for decades. Indeed, the data show that in the 70s and 80s, Canada tended to rank seventh among OECD countries and always in the top 10. In 1990, Canada fell to 14th, and has hovered around there ever since.
Expectations for a future rebound are low, too, and the Canadian government knows it: Canada’s 2022 budget cites OECD projections that suggest the country’s per-capita GDP growth from 2020 to 2060 will be the lowest among OECD members.
Is real GDP per capita a good measurement?
There are some critiques of the real GDP per capita measure. First of all, it doesn’t allow for nuance. Lander notes the statistic doesn’t account for things like environmental damage caused by a production process, so environmentally sustainable and environmentally destructive production are measured the very same way.
The per-capita concept of the average person’s take ignores the realities of inequality. A small percentage of a country’s population typically controls a huge amount of its wealth, so an increase in the GDP per capita statistic won’t necessarily mean everyone is earning more.
“The measure is known to be imperfect but any alternatives have their own imperfections," Lander said. “So you stick with the status quo rather than … replacing one bad measure with another.”
What’s causing Canada’s productivity decline?
Experts suggest a number of reasons, but one of the dominant explanations is around innovation, and specifically that the U.S. economy seems far more capable of doing it well.
"Yes, our productivity is weak,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute (MLI) and former chief economic analyst for Statistics Canada, told Yahoo Finance Canada. “But fundamentally, what it's really showing is that we don't have the ability to innovate.”
There are a handful of theories about why that may be true: Canada’s relatively small number of big businesses and abundance of small and medium-sized businesses mean most companies don’t have the scale or size to invest in R&D; the proximity and size of the U.S. market could lead to complacency among some businesses; rules governing ownership mean some industries can be seen as what Queen’s business professor Barry Cross deems “stable oligopolies.”
There may even be a cultural difference that plays out in terms of innovation: “Failure is a fundamental part of the U.S. ethos,” said Concordia’s Lander. “It is a risk-taking economy. It is built on capitalists that are willing to try new things and not afraid to fail. Canada is a little more small-c conservative, in that failing is not as much a badge of honour.”
Lander also argues that infrastructure issues are slowing Canada down. Governments haven’t invested adequately in transit systems, housing programs and other resources that would help a growing population work more efficiently, he says.
How can it be fixed?
Various steps to create a landscape favourable to competition and risk-taking exist, with some economists pointing to corporate tax reductions and removing red tape as the most essential and obvious.
“If you were founding a business in North America, why would anybody choose Canada?” asked MLI’s Cross. “Given the more hospitable business climate in the U.S., why wouldn't you just go there and export back to Canada?”
Asselin at the Business Council advocates for the creation of ecosystems in specific sectors that leverage savvy public-private partnerships to support R&D in universities and give businesses runway to use the intellectual capital that emerges.
“I can see doing that for energy,” he said, and then find “five or six other sectors” to develop. “We have really everything that the world needs, but we need to kind of get a notch further on the technological side.”
The need for major reforms means the project is a daunting one, says Lander.
“But until a politician steps forward saying ‘Hey, I'm gonna put my name to this and if you have to turf me after five years, fine, but get out of my way’ … I don't think that it's going to be easily accomplished.”
