By Ketki Saxena
Investing.com -- A recent report from TD Economics reveals that, despite having a robust economy, Canada falls short when compared to other advanced economies based on standard of living metrics. The main culprit? Persistently low productivity rates.
In spite of experiencing an economic downturn due to the pandemic, Ercolao notes how the country’s economy has been bolstered by “supercharged immigration” and a rising population which fuels consumption and housing demand. However, he cautions against equating strong economic growth with prosperity; when adjusted for population increase his analysis paints a less rosy picture for Canadians.
Marc Ercolao, an economist at TD Bank (TSX:TD), highlights that even with “solid headline growth over the last few years,” real GDP per capita—a key measure for standard of living—shows that Canada is lagging behind economic peers like the U.S.
Ercolao also dismisses any simplistic explanations attributing these shortcomings solely to rapid population growth. Instead, he points out that insufficient growth in real GDP—the numerator in calculating per-capita income—is tied closely with long-standing productivity issues.
“There may be a tendency to pin the blame for Canada’s sagging per-capita showing on the country’s rapidly-growing population base given that it has inflated the denominator of the calculation,” Ercolao said in the report.
“However, at the crux of the problem is insufficient growth in the numerator, which in turn is tied to longstanding productivity issues", Ercolao noted. “Sagging productivity showing that has been plaguing the Canadian economy for many years despite the well-intentioned moves of this countries’ policymakers to try and address it".
"What truly lies at heart are declining productivity levels which continue affecting us despite numerous attempts made by policymakers rectify them."
He also attributes this underperformance partly to oil price shocks experienced during 2014-15 and more recently to fallout from the COVID-19 pandemic.
Canada's lackluster performance can also be attributed to various factors including a dearth of research development (R&D) spending resulting in what he refers to as an “innovation gap.” This persistent underfunding has led to a continual decline in R&D expenditure over the last two decades and currently stands at a mere 1% - a total output half of the US, and lower than most other countries worldwide.
In addition, Ercolao identifies reduced investments in non-residential structures, machinery equipment, and intellectual property post-2015 as another cause of relatively low productivity across the country.
Looking ahead, there seems to be little respite for Canadians in the near future.. or even until 2060.
"Unfortunately for Canadians, little turnaround in Canadian living standards appears to be on the horizon. Real GDP per capita has already contracted over the last three quarters and our most recent forecast points to persistent contractions until the end of 2024"
"In the coming quarters, the economy is expected to suffer a cyclical slowdown as ambitious federal immigration targets continue to prop up population flows."
Until 2060, Canada is set to lag behind all G-10 peers in per capita GDP growth, as per an OECD report.