Problems in Canada Economy

Canada has an abundance of natural resources.

Why Canada’s Economy is Doing Worse than You Realise

It has the third largest known supplies of oil in the world, helping to make it the 10th largest economy in the world and top 20 GDP per capita. It benefits from close economic ties with the United States, the Commonwealth and has a highly educated workforce.

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In the past two decades it has grown around 2.5% a year which is quite respectable, but also misleading, if we take into account Canada’s population growth, GDP per capita growth is a disappointing 0.9% a year.

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Canada’s natural advantages are declining and it faces familiar problems – an ageing population, chronic housing costs and a lack of productivity growth. Can Canada cope with the challenges of the new age or is it doomed to fall further behind it’s noisy neighbour on the southern border?

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In the credit crunch of 2008, Canada was relatively insulated. Unlike the UK and US it was less impacted by financial turmoil. However, since 2008, in dollar terms, the economy has slipped behind the US and Australia. Australia is a good comparison because the two countries have similarities – large land mass, commodity-rich English speaking and high living standards. The recent commodity boom of 2022 helped the Canadian economy because with oil prices soaring, it benefits from higher revenues. But as prices slip back down, it is a reminder Canada cannot rely on fossil fuels.

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Given Canada’s huge reserves of oil and gas, a good question to ask is why can’t Canada develop greater wealth like other oil giants. Canada’s continental size and landscape are both an asset and a cost. A problem Canada faces is that it is significantly more expensive to extract oil from the frozen wastes of northern Canada. With the US expanding production of cheap Shale gas, Canada struggles to be competitive, and its oil industry is more reliant on high prices.

Unlike the US, Canada is much more reliant on trade with the rest of the world. Its principal trading partners the UK, Europe and China are all seeing slower economic growth, causing a fall in demand for Canadian exports. But, more concerningly economists worry that hidden from headline statistics, Canada is losing its long-term competitiveness. The main reason is declining productivity. Compared to the US, Canada has slipped behind quite significantly. The reasons for this fall in productivity, include lack of investment and lack of innovation. The Business Council of Alberta estimates the sprawling geography of Canada create internal trade barriers equivalent to a 6.9 per cent tariff on goods. Canada’s geography is a mixed blessing. Its low population density is a drawback for efficiency, worsened by relatively small manufacturing firms who struggle to gain global economies of scale.

Apart from cultural pop icons, Canadian has struggled to develop a global penetration for its business. Blackberry threatened for a while before spectacularly imploding. Despite impressive levels of education, a weakness of the economy is low levels of innovation and entrepreneurship.

Canada has one of lowest rates of levels of R&D at 1.6%, similar to Australia but less than OECD average of 2.7% – This is often the curse of an oil-rich economy, there is less incentive to innovate elsewhere in the economy. Canada has a low level of patents. Patents granted per 10,000 people are a mere 5.9 in Canada compared with 9.9 in America and 28.2 in South Korea.

Immigration

In common with most of the world, Canada has an ageing population and sharp fall in fertility. With low population density and the need for skilled workers it has embraced relatively high rates of immigration – being able to be selective in picking highly skilled workers. In the 2010s, immigrant workers accounted for 84% of the growth in the labour force. Recent immigrants make up 8% of the total workforce. This has led to a surge in the population. Nearly 3% population growth last year. If this rate of growth was to be maintained, its population would double from 40 million to 80 million by 2050. This net migration has boosted real GDP growth and is contrast to shrinking countries like Italy, Japan and Korea, However, the growth in population has hidden the slower growth of real wage per person.

Like elsewhere high levels of migration has created the usual tension between those who support the economic benefits of migration and the fear it is worsening issues such as housing costs and pressure on public services.

Housing Crisis

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It has not been helped by the fact that Canada’s housing market is one of the biggest bubbles in the world. It has the 2nd highest rate of house price to income in the OECD. Real estate is by the biggest sector in the whole economy. Mostly avoiding the problems of 2008 credit crunch, prices soared in the 2010s  through a combination of low-interest rates, rising population and restrictions on building. All this combined to push prices and rents out of reach, this is the hidden crisis of Canadian living, creating a society of winners and losers and housing. It is a familiar story across the world, but Canada’s crisis is one of the most acute.. The political pressure was so bad, that the government passed a law banning foreign ownership of homes. It was mostly tinkering at the edges and will have only minimal effect on improving affordability, but it reflects the concern felt by young people over the difficulty in living. Even though Canada is a popular destination for migrants. It is seeing the highest rates of net emigration has people leave. Reuters report a typical migrant who fled Hong Kong, but found herself paying 30% of her income on small basement flat.

Worries about soaring rents Canada has also had to place a cap on international students.  International students are a source of revenue for universities, which are highly rated globally.

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GDP is not everything. Canada ranks highly on life satisfaction indicators, such as health, education and freedom. It’s major cities are considered amongst the most desirable places to live, as long as you can afford the housing.

Also, whilst the economy is struggling with the move to decarbonisation, it also offers new opportunities. Canada is also rich in copper and nikel – vital ingredients in green technology. Global warming could also open up more of the country to be habitable. For example, melting ice in the Arctic opens up possibility of more cargo travelling through the north west passage. Yet, even this brings up new challenges. In terms of defence spending, Canada has one of the lowest rates in NATO. Just 1.3% of GDP. Below the 2% minimum, which Trump and Nato have considered to be an absolute minimum. Historically, Canada’s geographical position has given it an easy ride. Its only land border is with the world’s military superpower and ally the US. This means there is little incentive to spend a fortune on defence. But, the increased importance of north west passage, have the potential to raise tensions with China and Russia. At the least there is pressure on Canada to spend more on defence at a time when the government is struggling with rising public sector debt.

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Debt rose in Covid to 100% of GDP. But, unlike the US, Canada has not pursued expansionary fiscal policy. It means the current state of the economy is weaker than its neighbour. But, the key issue for Canada is not short terms swings in demand and growth, but can it transition to a stronger, more diversified long-term economy. It has a lot of assets, strong institutions, good international relations, abundant natural resources and educated people. Yet, there is a sense of missed opportunities. Outside oil, the economy is falling behind, and immigration whilst a solution to an ageing population and risk of shrinking population, is exacerbating a housing crisis which is making life miserable for many young people. Given Canada’s very low population density, there is no excuse for not building more houses. It needs the vision to expand out of popular metropolosis. Canada is still heavily dependent on its neighbour. Will Trump get reelected and throw away NAFTA. This could depend on whether the US economy maintains its current economic growth – this video looks at whether the US growth is sustainable or heading towards a bust.

UK and US vs Canada

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