Good morning,

You might not know it but Canada has a growth problem.

What looks like a solid economic recovery from the pandemic actually masks an underperformance in standard of living that is among the worst of advanced economies, says a new report by TD Economics.

“Economic growth does not necessarily equate to economic prosperity,” said TD economist Marc Ercolao.

On the surface Canada’s economic growth looks healthy. “Supercharged” immigration and population growth helped drive a quick recovery in activity after the pandemic, particularly in consumption and the housing market.

According to Statistics Canada, our population is growing at a record pace, rising by 1,050,110 in 2022, the first time in Canadian history the population has grown by more than 1 million people in a single year.

“While aggregate GDP is one thing, standard-of-living is another, and when Canada’s economic performance is adjusted for the rising population count, it reveals a picture that leaves much to be desired,” said Ercolao.

On the world stage, Canada is one of the few advanced economies that has not recovered its pre-pandemic standard of living, measured by real gross domestic product per capita.

This measure has contracted over the past three quarters, and TD forecasts it will continue to shrink until the end of 2024. More alarming, the Organization for Economic Cooperation and Development predicts that Canada will place last among OECD members in real GDP per capita growth until 2060.

It wasn’t always so.

At the start of the 1980s Canada’s per capita GDP was almost US$4,000 above the average of advanced economies, but by 2000 this advantage had all but disappeared, said Ercolao. That year U.S. per capital GDP exceeded Canada’s by more than US$8,000.

Since the 2014-2015 oil shock, “Canada’s performance has gone from bad to worse,” gaining a mere 0.4 per cent a year compared with an advanced economy average of 1.4 per cent.

So what’s the problem?

At the core of the issue is sagging productivity, something Canada has been battling for years, said Ercolao, who identifies several forces behind this.

Among them are “lacklustre” business investment in buildings, machinery and intellectual property over the past eight years and a longer-running decline in research and development spending that has led to an “innovation gap.”

“Over the last 20 years, Canadian R&D investment has been in perpetual decline, while all other G7 countries have seen increases to varying degrees,” he said.

In 2021 Canada’s R&D spending was about 1.7 per cent of GDP, half the share of America’s and lower than most other countries.

Canada’s economy also contains a relatively large number of small companies, which tend to export and invest less than bigger firms. Inefficient regulations and tax policies are other factors cited as holding back productivity and innovation, he said.

Some provinces are better off than others. Oil-rich Alberta, Saskatchewan and Newfoundland & Labrador show the highest levels of GDP per capita because of spending in the energy sector.

But their status has been slipping as well since last decade’s oil crash and the industry’s shift away from large projects and investment.

“Unfortunately, for Canadians, little turnaround in Canadian living standards appears to be on the horizon,” said Ercolao.

The issue has flown under the radar because productivity problems have been masked by growth from the influx of new workers, but, “it is becoming increasingly difficult to ignore Canada’s widening real GDP per capita gap versus other major economies,” he said.

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Home sales will be hit by higher borrowing costs and tight inventory for the remainder of this year and next, the Canadian Real Estate Association predicts.

CREA slashed its forecast for home sales, predicting they would be down 6.8 per cent in 2023. Home sales are expected to rise over 11 per cent in 2024, less than previous forecasts.

“With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market,” the CREA said in a statement on Friday, July 14.

Signs of that showed up in June’s data as the rebound in the housing market slowed.

Sales rose by 1.5 per cent (seasonally adjusted) after April and May saw gains of 11 and 4.6 per cent, respectively, said Desjardins principal economist Marc Desormeaux, who brings us today’s chart. Sales increased in half of local markets compared with 70 per cent in May, with Toronto sales falling the most since September 2022.

New listings rose for the third straight month, a trend Desormeaux should be monitored closely.

“If the recent listings trends persist amid higher interest rates and softening resale activity, that presents clear downside risk to Canadian home prices,” he wrote.

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Investors are panicking that high interest rates, high inflation and other economic issues are going to plunge us into a deep, dark economic abyss. Do you need to worry? These are the five economic scenarios we may be facing — and they’re not as scary as you think

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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