Canada's struggling economy at year's end
I find it fascinating that a prestigious and respected international organization such as the OECD (among others) can claim, with their latest Economic Outlook (OECD Economic Outlook, Volume 2024 Issue 2 | OECD), that the global economy has "demonstrated remarkable resilience". I assume they're talking about the past one or two years, and that by "resilience" they mean the following (from the introduction to their outlook): "Inflation continues to moderate, with headline inflation returning to central bank targets in most economies...Global trade has also been recovering...Global GDP growth is expected to strengthen slightly to 3.3 per cent in 2025.", etc., etc.
But, before getting into details, I ask whose global economy are they talking about? As stated, the 3.3 per cent number is the projection for global economic growth, a weighted average that includes China, India, and many other so-called "Emerging Markets", who aren't OECD members or considered part of the so-called "advanced world". The projection also includes the U.S., whose economy is booming - with real GDP growth of nearly 3 per cent per year over the past two years. In much of the rest of the West, "remarkable resilience" appears to be wanting. The Euro Area managed to eke out a paltry 0.5 per cent real GDP growth in 2023 and 0.8 per cent this year. Japan's economy is projected to have contracted by 0.3 per cent over 2024. Is this what passes for remarkable nowadays?
In Canada, meanwhile, real GDP growth has hovered around 1 per cent for the past two years. And, with the expansion of our population by three million persons, overwhelmingly through immigration, real GDP per capita has been declining since mid-2022 (See figure below). Since 2019, Canada's population has expanded by 11 per cent, while the economy has grown by only 7 per cent in real terms. As a nation, we're becoming poorer in absolute and relative terms. According to the International Monetary Fund (IMF), Canada's GDP per capita (at current prices) relative to the U.S.'s is estimated at 61.6 per cent by the end of this year (today, as it happens). This contrasts starkly with the early 1980s, when our GDP per capita relative to the U.S. was over 80 per cent. In other words, Americans are, on average, 62 per cent richer than Canadians (See, for example, World Economic Outlook (October 2024) - GDP per capita, current prices). A trip to Boston Massachusetts, or even Burlington Vermont, would confirm this in anecdotal terms.
It's clear from examining the figure above (courtesy of Haver) that Canada's economy has not proven remarkably resilient, even using the narrow definition related to real economic growth, inflation, etc. And, yes, while inflation has come down significantly in Canada over the past two years in the face of a sharp rise in interest rates, the level of prices remains very high relative to both median family income and the cost of housing. In fact, the prices of essentials such as food, fuel, and housing seem excessive not only relative to median family income and housing, but also relative to prices south of the border, or in Germany or France (let alone in so-called Emerging Markets). This is particularly true if one wants to consume natural foodstuffs - free of petrochemicals, seed oils, etc.
Beyond GDP per capita and related numbers, it appears as though Canada and much of the rest of the non-U.S. West is not only not "remarkably resilient" but rather sinking deeper into both relative decline (relative to East Asia, for example) and absolute decline. In Canada, food bank visits have doubled since 2019. Crime, and crime severity, are up, with police unions in Ontario (and other jurisdictions) now openly criticizing Liberal crime reform. There is an ongoing opioids crisis. The "universal" health care system has been unravelling since before COVID, with artificial shortages of family doctors and real shortages of emergency doctors, nurses and other urgent care personnel. A stroll through the Centertown of Ottawa (a G7 capital!) unfortunately provides a fine example of a rotting underbelly of a city in decline, with a new, exorbitantly expensive and long-awaited light rail system that often doesn't work. Such anecdotal evidence really hits home when you come fresh from a visit to Seoul or Shanghai or Tokyo or Warsaw. (And why do we seem to find it so difficult to manage metro systems with 2-3 lines while our counterparts in Beijing, Shanghai, Paris, and Tokyo manage systems with 20-30 lines.)
I write this knowing that it may get the backs of chest-thumping patriots up or come as a surprise to some who may not always see what's right in front of them. However, a person with genuine affection for his homeland must be free to criticize it with the aim of improving it; and not just express some sort of generic patriotism, while eschewing any critiques as "pessimism", or, worse, disregard socio-economic facts on the ground because one is out of touch with the daily realities of the majority. Having worked in the Canadian Ministry of Finance most of my career, I learned to do realism, and not optimism or pessimism, even if it makes some people uncomfortable.
Looking ahead, Canada is facing the most profound challenges since the end of World War II. We have an aging population and workforce. Our economy has become much less diversified (and thus less resilient) over the past 40 years, which is the direct result of our self-induced deindustrialization under the misguided philosophy and policies of 1981-2008 Hyperglobalization era. The world is shifting away from fossil fuels while our domestic economy and exports remain heavily carbon intensive. Liberal immigration policy seems to be based on an upside-down version of the "build it and they will come" notion from the film Field of Dreams, and runs something like, "bring them and it (the economy) will be built". The economy (and the wider society in which it is embedded) does not work like a four-equation model from introductory economics; it's an extremely complex system that interacts with other complex systems. Demographic and economic dynamics need to be managed, to some degree - and not left to hope alone or misplaced ideology (whether on the Left or Right).
Moreover, if we bring in tens of thousands of doctors and engineers and tradespeople from the rest of the world out of the needs of economic expansion and prosperity, then perhaps we should allow them to work in their professions as quickly as possible and not leave them to the vagaries of the Gig Economy. Otherwise, what are we doing? Or was the purpose of the large spike in post-COVID immigration to suppress wage growth in so-called Blue-Collar and service sectors of the economy? It's worth noting that the Washington DC-based IMF wrote in its latest critical appraisal of Canada's economic policies, which is called an Article IV Consultation, that since the end of the pandemic the "increased supply of foreign workers filled a need in labour markets and supported near-term growth, while likely moderating wage increases" (Canada: 2024 Article IV Consultation-Press Release; and Staff Report - page 5)
Regardless, all these factors and dynamics are weighing on our productivity growth (which is negative) and prosperity (which is declining), as well as giving rise to new social and political cleavages. And, on top of all the unpleasant economic and socio-economic arithmetic, or because of it, we are facing political chaos and instability - with all major opposition parties in Canada's parliament calling for an election. Political chaos and the growing unpopularity of incumbent political classes are also evident in France, Germany, Korea and other parts of the West. All this in the wake of the re-election of the political outsider and so-called Destroyer-in-Chief, Donald Trump, whose MAGA movement and "America First" vision are at obvious, long-term odds with the previous (1981-2008) paradigm of global economic integration and a united West. Another way of saying this is that much of the non-U.S. West faces not only an economic crisis, but also political and geopolitical crises - as previous international rules, norms, and alliances no longer necessarily and automatically apply. Meanwhile, global economic and geopolitical power continue to gravitate towards China (and the other economic miracle countries of East Asia) and the wider BRICS world, while geopolitical power within the West concentrates in the U.S. under President Trump.
What is most concerning is that the absence of strong leadership in the non-U.S. West comes at a critical juncture. A new global order has emerged over the past decade in which might is right and transactional approaches to trade and foreign policy increasingly replace rules, treaties, diplomacy. This threatens the prosperity of medium-sized countries such as Canada. Furthermore, the largest countries and economic areas - the U.S., China, India, Japan, the EU, and others - are using their vast fiscal resources to further build (or rebuild) advanced manufacturing capacities under the new paradigm of either green industrial policies, or strategic autonomy. Where does this new global order based on realpolitik and the reshoring of manufacturing leave Canada?
Before getting deeper into this question, it is worth noting that the breakdown in international rules and order has been attributed by certain powerful ("special") interests within the West to certain "adversary" countries outside of the West, and to populism and Trumpism. I wonder whether this narrative make sense. Let's subject it to scrutiny.
All these questions apply, at least in part, to the rest of the Anglo-American West.
Apart from exploring different, more accurate narratives to explain the evolution of our economies and societies, and in addition to accepting some harsh realities (there will be no return to the pre-Trump era), what is there to do? One critical priority for Canada is a fundamental rewiring of international trade policy and wider foreign policy. Of all G7 countries (if that comparison even makes sense any longer), Canada is in a particularly precarious position vis-a-vis international trade. European countries have the immense EU area to shelter their trade and prosperity. Japan and Korea have deep trade links with every major region of the world and are firmly integrated in the gigantic East and South Asian trade area. The U.S. has its own vast internal market - the world's largest at market exchange rates - and is one of the only countries (if not the only one, perhaps along with China) that could close off its economy to most trade and still prosper.
What about Canada? Part of what still makes it a rich country is international trade: exports account for one-third of GDP, at least 80 per cent of which are sold in the U.S. This trade - this crucial source of Canadian prosperity - now appears threatened not because of the fragmentation of the global order along supposed geopolitical lines (after all, we trade mostly with the U.S.), but rather because our trade with America's people and businesses seems at the mercy of President Trump alone, as opposed to a wider oligarchy of business, state and national interests. And, toeing the line of successive American Presidents in the area of foreign policy (i.e., Obama, Trump 1, Biden) over the past decade and more now make export expansion into China and the wider BRICS area much more difficult. At the same time, new European climate policies will very likely make trade with the EU area increasingly costly for Canada. So, with whom shall we trade? With whom shall we trade if punitive U.S. tariffs on imports from Canada are imposed next month. With whom shall we trade if the EU presses ahead with carbon-adjustment tariffs. With whom shall we trade if (partially self-induced) tensions with China and India remain. With whom? Tuvalu? That is one question.
The more all-encompassing question is this: where shall we find new sources of economic expansion and prosperity? Not in fooling ourselves into thinking that all is well (if it just weren't for Trump and his trade threats) and that we've been "remarkably resilient". Better to peer into the looking glass head on and sober-like, acknowledge the challenges and problems we face, and see what - realistically - there is to do about them. The reality of our situation points to continued decline in the absence of fundamental change. I would even go further and argue that the past 10 years feels like a "lost decade" of policy drift, or policy made on the basis of anachronistic paradigms (in the end they amount to the same thing). And we're headed for a second lost decade unless we weave together a bold new vision for Canada, backed by a new political class with courage, open-mindedness, integrity, tenacity, a grassroots in-touch-ness with everyday people and their needs, and a popular mandate to make difficult-but-necessary decisions.
Economic renewal and change will not only require the formulation of new economic paradigms and policies based on objective truths and more accurate narratives, but will need to be done urgently, and regardless of whose ideological sensitivities are bruised. As this year winds to a close, we need begin formulating a national strategy to restore our prosperity based on a new vision for the 21st Century, and its associated realities, challenges and opportunities. We need a vision based on the rebuilding of an economy that works for people, which Canada used to have, rather than one that works against them (which seems increasingly to be the case right now. In the face of the current, powerful forces of Trumpism, deglobalization and fragmentation, we will need to align domestic demand closer to domestic production. In the wake of WWII and prior to peak Hyperglobalization, Canada produced a wide range of goods beyond raw materials, automobiles and energy - from household appliances and everyday consumer goods to heavy machinery and airplanes (trains and rail systems) to high-quality toys and other light, medium and heavy manufactured goods.
The bad news is that we have moved far away from that reality. The good news is that we still have the wealth and technical capacity to rebuild a modern, diverse and dynamic economy. We're an intrinsically rich country. We have all manner of resources, including the vitals of energy, water and land. Our network of universities and research laboratories, while in urgent need of public and private investment, remains comparatively solid. Our population is approaching the size of a large European country, with a growing internal market to boot. There is ample opportunity for expansion.
What we need to do - among other things - is free ourselves from traditional approaches to trade and foreign policy with the idea of trading with as much of the world as possible (particularly Asia). We also need to free our economy from the cobwebs of mini-monopolies and vested interests that are stifling our dynamism and growth; we need more markets and competition, not less. We need to move away from being an economy increasingly based on transfers of income to one based on competitive labour (and product) markets, in which rates of employment and higher wages would slowly replace open-ended social insurance schemes (as in the Nordic states, Switzerland, etc.). In short, we need to unleash Canada's vast intrinsic wealth by forging a proper internal market. This will not happen, as some suggest, by addressing some grocery list of "inter-provincial trade barriers", as most trade is north-south and not east-west because we mostly ship out raw materials, energy and auto parts while mostly importing finished products. Rather, forging a proper internal market will require a national economic strategy akin to what turned Canada from a sleepy, agricultural-based northern country into a significant global manufacturing economy over the course of WWII. While markets could produce and distribute most of the goods and services of a 21st Century economy, such a transformation would require the guiding hand of an enlightened government and bureacracy, free of 19th and 20th Century ideologies.
Forthcoming articles in this series will explore options for Canada's trade, industrial and foreign policies.
Happy New Year!!