Canada’s economy had a stellar year in 2017, leading G-7 countries in growth with a GDP expansion of 3.0%.1 While short-term macroeconomic concerns exist – particularly surrounding the NAFTA renegotiations and the state of Canada’s housing market – 2018 is poised to be another year of solid growth. Experts forecast the economy will expand 2.3% (2nd highest in the G-7, behind the U.S.), propelled by gains in government spending, business investment and exports.2
Within this context, Canada is facing macroeconomic currents that are cause for concern, which Chris Gee of Deloitte Economics refers to as macroeconomic trends. These trends are global, long-term, and will have an evolving impact on Canada’s economy. Municipalities will need to take action in order to overcome the challenges they present.
SLOW AND SUSTAINED GROWTH
It has been a decade since the 2008 global financial meltdown, yet economic growth across the developed world has not returned to the levels present before the crisis. Canada has experienced average annual growth of 2.2% since 2010, (since the beginning of the recovery from the global financial crisis), whereas its economy expanded 3.2% on average between 1985 and 2007.3 Experts forecast that those historic growth rates will not return. Analysis from Conference Board of Canada suggests that annual GDP growth will hover around 2% in the country for the next 20 years.4
This period of slow and sustained economic growth has two key implications. The first concerns public finances. Less economic expansion translates into a smaller tax base for government to generate revenue. However, periods of slow economic growth also generate higher demand for public services, as businesses and people require more support. This dynamic creates an imbalance, putting increased pressure on the government to spend money at a time when raising funds is more difficult.
The second implication concerns monetary policy. The Bank of Canada has maintained very low interest rates in attempt to stimulate greater economic activity and meet its inflation control range (between 1% and 3%). In this environment, investors are chasing higher yield securities and Canadian households are taking advantage by borrowing. The current household debt-to-income ratio in Canada is nearly 170%.5
Broadly speaking, these investment and consumer behaviours may sow the seeds of market bubbles. To help mitigate potential risks, Canadian governments are implementing economic policies like new housing market regulations in Ontario and British Columbia.
A demographic shift is taking place across Western economies, including in Canada. Populations are getting older, with longer life expectancy, declining birth rates and the large baby boomer generation reaching retirement age all contributing to this trend.
Canada’s aging demographic has economic implications principally because it alters the mix of working and non-working populations. Experts forecast that 23% of the country’s population will be over 65 years old by 2035, compared to 17% today.6
Within this context, Canada will have to rely on immigration – that is, net new labour – and productivity gains to expand the economy and develop the tax base. This objective is especially critical in light of an aging and retiring population, which will increase demand for public services.
“Future economic growth is dependent on labour, capital and productivity,” explains Gee. Yet we are approaching the first time in history when more of the population will be retired than working. “As the workforce gets older and the baby boomer generation reaches retirement, both labour supply and productivity are going to be negatively impacted – while at the same time we are going to see an increasing demand for healthcare.”
1. International Monetary Fund
2. International Monetary Fund
3. Statistics Canada
4. Conference Board of Canada
5. Conference Board of Canada
6. Statistics Canada