Canada in 2060: Why good policy now matters

Normally, I would say run, don't walk, if someone offers to give you an economic forecast that spans, say, five decades. Having said that, the Organization for Economic Co-operation and Development's (OECD) newly released 'Looking to 2060: A Global Vision of Long-Term Growth' is not only a very credible view of what the future might hold, it highlights the places the where it had to make assumptions and how different assumptions could change the future. Essentially, it shows that the right policy choices could lead to a better outcome – especially for Canada.

Not that the OECD sees a bleak future, just a disappointing one. The world is still reeling from the global recession and, as they point out, that will keep economies on the sluggish side for a while. Still, the OECD only foresees a temporary weakness in trend growth, not a long term switch to a slower speed. As well, at least in the short term, it sees the emerging economies – China, India, Brazil, Indonesia – growing fast enough to offset sluggish growth in the developed world. That's about it for the good news, however.

The OECD does see a slower global speed limit as a result of aging populations. That is not a new story: For decades we have known that declining fertility and longer lifespans would mean proportionately fewer people in their working years in many countries. All things being equal, the more quickly that countries age the higher their 'old-age dependency ratio' (proportion of those over 65 as compared to those of working age) and the lower their rate of economic growth. Some parts of the world, and in particular Europe, are facing something close to a demographic crisis.

Demographics also explains why China, the growth darling of the past few years and the great hope in the wake of a weak U.S. and Europe, is not such a sure bet after all. Thanks mostly to the one-child policy in place since 1978, China's dependency ratio is set to quadruple by over the next fifty years. It will not taking nearly that long, however, for China to lose its status of global growth superstar. Looking at the demographics, the OECD projects that within a decade India and Indonesia will each be growing more quickly than China.

Although they admit it is a 'speculative' forecast, it might be a good idea to take a look at the OECD's musings on interest rates. The OECD projects that beyond 2030, interest rates are more likely to rise than fall. After all, right now we are in an incredibly abnormal period of low rates, which cannot possibly last forever. More than that, however, older populations tend to save less than those with more people in their middle years. For the next couple of decades, high savings from India and China will keep the word savings pool high, which will help keep rates down. After that, demographics suggests that there will be a smaller pool of world savings, and hence the likelihood of higher interest rates over time. It is not a bad reminder that things can change, coming as it does when many people can barely remember or have never seen interest rates in the double digits.

Canada gets a cautious, middle-of-the-road, not that exciting (dare I say 'Canadian-style?') rating from the OECD. Like most other countries, Canada is aging and in the absence of radical moves, potential growth is headed lower. Between 1995 and 2011, Canada's economy grew by an average of 2.6 per cent per year. All things being equal, that's headed down to 2.1 per cent between now and 2030, and 2.6 per cent between 2030 and 2060. That's a little slower than the world and U.S. average for the short term, and a little higher for the longer term. (all figures are percentage change in gross domestic product expressed in U.S. dollar adjusted to 2005 Purchasing Power Parity terms). In practical terms, that growth a bit too weak to meet all the demands of an aging population --without sacrificing something else.

The light at the end of the tunnel to this fairly gloomy report is that there is still time to change the future. The OECD makes the point that we have heard over and over again: higher productivity could offset the impact of aging and keep the world growing smartly. High productivity, however, comes from sound policies that increase competitiveness. The paper focuses on the need for those policies in countries with low living standards, but the analysis could just as well apply to Canada. As we know from any number of studies, Canada's productivity performance is sub-par at best, and focusing on an improvement can only be a good long term move.

The whole OECD forecast is based on what will happen unless something radical changes. For Canada, at least, there is still time to make some of those radical changes. Canada's sound fiscal situation means we have more leverage than many countries to shape the future.

Linda Nazareth is the principal of Relentless Economics and senior fellow for economics and population change at the Macdonald Laurier Institute. Visit her at relentlesseconomics.com