A man crosses by the Toronto Dominion Centre main building on May 10.Tuan Minh Nguyen/The Globe and Mail
Justin Trudeau missed an opportunity when he shuffled his cabinet this week. He should have appointed a minister of economic coherence.
The Prime Minister could have handed this unfortunate soul the job of explaining to Canadians how the various disjointed parts of the Liberals’ agenda fit together.
Among other things, this would have involved explaining how a government can insist it is in favour of more affordable housing while it simultaneously encourages a boom in immigration and temporary workers that is overwhelming the country’s demonstrated capacity to build homes.
Sadly, though, there is no minister of economic coherence. Until there is, investors might want to ponder how much they should bet on Canada’s growth trajectory.
At first glance, this trajectory doesn’t look so bad. Over the past four decades, the country has managed to expand its economy at a reasonable clip.
That record is deceptive, though. Much of it simply reflects Canada’s steadily growing population. Since more people mean more workers, a larger population nearly always implies more economic output – or gross domestic product (GDP), as economists call it.
More GDP is great, so far as it goes. The problem is that it doesn’t necessarily increase prosperity or lift the nation’s living standards. If a country’s population is growing just as fast as its output, then the average person winds up no further ahead. They are neither richer nor poorer than they were before.
What really matters when it comes to raising the standard of living isn’t how fast a country can boost its GDP, but how fast it can raise its GDP per person. Healthy, sustained growth in real GDP per person is what allows each of us to consume more and live better.
On this score, Canada isn’t doing well at all. In 1980 it had GDP per person similar to that of the United States, according to Toronto-Dominion Bank TD-T. Both countries were about US$4,000 a person ahead of other advanced economies.
Not any more. Canada’s GDP per person now lags more than US$10,000 behind that of the U.S. in terms of inflation-adjusted purchasing power. It has also fallen behind the average of other advanced economies.
“Since the 2014-15 oil shock, Canada’s performance has gone from bad to worse,” Marc Ercolao, an economist at TD Bank, wrote in a report this month. He calculated that Canada’s real GDP per capita has inched ahead over this period at “a meagre rate of only 0.4 per cent annually, paling in comparison to the advanced economy average of 1.4 per cent.”
This dismal performance can be blamed on a couple of culprits, according to Mr. Ercolao. For starters, Canadian companies are not investing enough in new factories and new equipment to make workers more productive. Businesses are also not investing enough in research and development to create innovative new products.
That sinking feeling
Canada’s real GDP per capita has steadily lost ground over
the past four decades when compared to other advanced
countries. (Real GDP per capita, in thousands of constant
international dollars, 2017 purchasing power parity)
$70
Canada
60
Advanced economies
U.S.
50
40
30
20
10
0
1980
2000
2022
the globe and mail, Source: TD economics
That sinking feeling
Canada’s real GDP per capita has steadily lost ground over
the past four decades when compared to other advanced
countries. (Real GDP per capita, in thousands of constant
international dollars, 2017 purchasing power parity)
$70
Canada
60
Advanced economies
U.S.
50
40
30
20
10
0
1980
2000
2022
the globe and mail, Source: TD economics
That sinking feeling
Canada’s real GDP per capita has steadily lost ground over the past four decades when compared to other
advanced countries. (Real GDP per capita, in thousands of constant international dollars,
2017 purchasing power parity)
$70
Canada
60
Advanced economies
U.S.
50
40
30
20
10
0
1980
2000
2022
the globe and mail, Source: TD economics
You might think Ottawa would want to focus on these investment gaps and look for ways to direct more capital into productivity-boosting investment. But no. Instead, it seems to be taken with the simpler notion of boosting the size of the economy by supersizing quotas for immigrants and temporary foreign workers.
This will no doubt expand GDP. However, it is unlikely to have much impact at all on GDP per capita since the output gains will be spread among many more people. As a result, “little turnaround in Canadian living standards appears to be on the horizon,” Mr. Ercolao concludes.
Investors may want to ponder this outlook. It suggests that we should be cautious about the outlook for Canadian stocks. There is no tight relationship between GDP per capita and stock market performance, but it’s unlikely the market will boom if general prosperity doesn’t.
Much will depend on government policy. As Mr. Ercolao stresses, the fundamental economic problem here isn’t so much the recent surge in immigration as Canada’s multidecade record of lacklustre productivity growth.
That said, it is reasonable to ask whether the recent influx of newcomers is overwhelming the capacity of a not-very-productive economy to keep up. Other TD Bank economists, led by Beata Caranci, warned this week that “continuing with a high-growth immigration strategy could widen the housing shortfall by about a half-million units within just two years.”
In this uncertain environment, it makes sense to focus on steady, workaday stocks that can benefit from surging population growth and budget-squeezed consumers. Discount retailers such as Dollarama Inc. DOL-T have appeal. So do grocers such as Empire Co. Ltd. EMP-A-T and Metro Inc. MRU-T
It also makes sense to consider Canadian companies with substantial foreign income.
Right now, Canadian companies with European revenue look particularly well placed, according to a report this month from Ian de Verteuil, head of portfolio strategy at CIBC. He argues that recent strength in European currencies should translate into good news for Canadian companies with substantial European exposure, such as Air Canada AC-T, CGI Inc. GIB-A-T, Couche-Tard Inc. ATD-T, Great West Lifeco Inc. GWO-T and Magna International Inc. MG-T
More generally, Canada’s lacklustre record on growing GDP per capita should remind investors of why their portfolios should be globally diversified. Until Canada’s economic policy makers make a more coherent case than they are now, there are excellent reasons to look beyond our borders.