Office towers, condos and apartment buildings in Vancouver on Jan. 19.DARRYL DYCK
Canadian investors have every reason to be frustrated. Now, more than usual, it’s difficult to know what to make of the outlook for the Canadian economy or for Canadian stocks.
On growth, on housing and on immigration, our elected officials offer up a torrent of slogans but not much in the way of clear logic or compelling rationales. This makes it difficult for investors to know what to expect over the next few years.
How could Ottawa improve the economic dialogue? One good way to start would be by replacing its obsession with gross domestic product (GDP), a broad measure of how much the economy produces in a year, with a new focus on GDP per capita.
The distinction between the two measures may seem trifling at first, but it is important. At a time like now, when Canada’s population is expanding at its fastest pace in decades, GDP by itself offers a flawed guide to how typical Canadian households are actually faring.
The problem arises because a larger population automatically means more workers, more productive capacity and therefore higher potential GDP. However, it doesn’t necessarily mean Canadians are living any better unless the increase in output is big enough to outweigh the increase in population.
Focusing on GDP at a time like this is a bit like obsessing over how large a pizza you will be ordering without pausing to think how many people will be sharing it. To assess whether people are actually getting enough, it’s preferable to look at GDP per capita – how much economic pie each individual is enjoying on average.
Yet politicians rarely talk about GDP per capita. Their silence may reflect Canada’s less-than-stellar record on this front. Since 1980, Canada’s GDP-per-capita growth has lagged far behind several similar countries, according to data from the Organization for Economic Co-operation and Development.
While people can debate exactly how best to measure this trend, “it’s clear that GDP per capita growth in Canada has been sluggish,” says Mikal Skuterud, a professor of economics at the University of Waterloo, who recently tweeted a chart showing Canada’s woeful performance on this measure.
Sadly, the trend shows no signs of changing.
The Bank of Canada estimates that Canada’s economy will grow 1.4 per cent this year and 1.3 per cent in 2024. That sounds, at first, like slow but steady growth.
Adjusted for population growth, though, it veers into downright ugly territory. With Canada’s population expected to swell at a 1.3-per-cent annual clip, the bank is essentially predicting a no-growth economy in terms of GDP per capita for this year and next.
Yes, that is a disturbing development. Just don’t count on anyone in Ottawa pointing it out to you.
Policy makers are equally murky when it comes to more specific issues such as housing. Scour politicians’ speeches and you’ll find lots of chatter about promoting housing affordability. But in the absence of any hard, numerical commitment toward building more homes and reducing home prices, it’s hard to take any of the rhetoric seriously.
Investors (and voters) are left guessing about what will happen next. Does Ottawa truly want home prices to fall? Or is it more inclined to support existing home prices to ensure Canada’s current homeowners don’t lose any of that lovely housing wealth they’ve accumulated in recent years?
Politicians have always danced around this question, but the stresses are reaching crisis levels. Canada has historically averaged 0.61 housing starts for every additional working-age person, according to National Bank of Canada. (The number is below 1 because there is more than one person in a typical household.) Today, after a bumper quarter for population growth, we are down to just 0.27 – less than half the historical pace and the lowest number on record.
There are two major culprits behind this enormous shortage of housing starts. The first is bottlenecks to development at municipal and provincial levels. The other is the greatly expanded immigration quotas put in place by the federal Liberals. They have raised the target from around 260,000 newcomers in 2015 to nearly 500,000 people a year now.
Some observers think enough is enough on the immigration front. “Ottawa should consider revising its immigration targets to allow supply to catch up with demand,” says Stéfane Marion, chief economist at National Bank.
Others are more hopeful that housing bottlenecks can be eased and that a renewed focus on recruiting the best and brightest can turn immigration into a source of GDP per capita growth. But even optimists say they are confused by what Ottawa’s immigration policy is trying to accomplish. In a recent column, Prof. Skuterud criticized the government’s “less-than-transparent” approach to setting immigration targets.
The government’s lack of clarity on this and other issues is disturbing. Shouldn’t our dismal record on GDP per capita merit a stronger response? How do supersized immigration quotas fit with an overwhelmed housing market? Until Ottawa deigns to share its reasoning on such matters, frustration is only going to grow and not just among investors.
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