Canadian Economy in good shape as 150th anniversary approaches, but challenges lie ahead

Ottawa — As Canada celebrates its 150th anniversary, a return to growth in the resource-rich provinces and continued robust performances in the rest of the country will support strong economic growth in 2017. Beyond this year, however, economic growth will increasingly be constrained by an aging population and tepid productivity growth.

While the economy posted average annual growth of 2.7 per cent over the two decades leading up to the 2008/09 recession, over the next 20 years Canadians will have to adjust to a new normal with much more modest growth averaging 1.8 per cent, according to a new report by The Conference Board of Canada.

“This year’s well above 2 per cent real GDP growth is a temporary reprieve from Canada’s future slow growth trajectory. By leaving the labour force in large numbers, the baby boom cohort will transform Canada’s economy, shrinking growth in the pool of available labour and slowing the economy’s trend growth (referred to as potential growth) over the next 20 years. This will have major implications for Canadians, businesses, and all levels of government,” said Matthew Stewart, Associate Director, National Forecast, The Conference Board of Canada.

Highlights

• The Canadian economy will see solid but short-lived growth well above 2 per cent in 2017, but this is a temporary acceleration.
• The moderation in trend economic growth reflects the impact of aging baby boomers leaving the labour force. Immigration will be key to limiting the slowdown in labour force growth.
• Despite its weak performance in recent years, business investment is expected to experience robust long-term growth as firms substitute capital for increasingly scarce labour.

Employment began to pick up over the second half of last year and job creation has remained strong in 2017. Labour markets across the country will gradually tighten over the next 20 years due to the aging of the population and the slowdown in labour force growth. Between 2020 and 2040, the exit of the baby-boom generation from the workforce will push up wages as businesses compete for skilled workers. This could motivate some younger boomers to delay retirement by a few years and will help offset a small part of the negative downward pressure on the participation rate.

Growth in real household expenditures is expected to slow significantly through to 2021, as household debt continues to hit new record levels and consumers are relying mainly on income gains to fuel consumption. However, the anticipated wage increases, due to the tightening of the labour market, will allow working-age consumers to spend more. At the same time, baby boomers will begin spending their retirement savings. The share of household spending on services will steadily increase boosting demand for transportation, health, and medical services helping the service sector post stronger growth than the goods-producing industries over the next 20 years.

Aside from the aging population, chronically weak business investment remains an ongoing concern for the Canadian economy. Business investment fell by $43 billion over 2015 and 2016. And, while energy investment was responsible for almost 80 per cent of this decline, non-energy investment has also receded over the last two years. Between 2022 and 2040, industries are expected to respond to labour shortages, wage increases, and greater international competition by substantially increasing their investment in productivity-enhancing equipment and innovation. Combined with improved labour quality, productivity growth should improve from its recent lacklustre pace.

Upward demand pressure on health care systems and age-related public payments, such as Old Age Security (OAS), will squeeze federal and provincial budgets for social services. Additional commitments to fund infrastructure, provide more funding for Aboriginals, and more generous child benefits will add additional pressure as well.

The Canadian Long-Term Outlook: Mid-Year Update forecast is produced annually by The Conference Board of Canada. The forecast includes a 20-year outlook, with a focus on Canadian demographics, labour markets, monetary and fiscal policy, household spending, investment and trade, and potential output (the highest level of economic growth that can be achieved without prompting inflation pressures). The Canadian Long-Term Outlook: Mid-Year Update is available on e-Library.