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Canada Poised for Decades of Slow Growth, Economist Says

Canada Poised for Decades of Slow Growth, Economist Says

Posted by Juan Gavasa on August 21, 2014

Canada is at the threshold of a new era. Unfortunately, it could be an era of slow growth, smaller business profits,  and a constrained stock market, according to a report from Desjardins Capital Markets. “The Canadian economy is now in a new era, and many standards for the Canadian economy…are now lower than they have been in the past,” said Benoit Durocher, senior economist at the Quebec-based firm and the author of the report.

There’s an upside, though: Desjardins said interest rates will also likely hover at lower levels, although that may weigh on those who rely on interest-bearing securities such as bonds for income.

Other economists have also suggested that slower growth looms over the next few years, but Mr. Durocher bolstered his view with a detailed analysis of economic trends in the last few decades and what they could foretell for Canada.

And the prognosis is negative, in several areas. The report said GDP growth for the business sector will average a tepid 2% annually in 2014-20 and even less–1.7%–in 2021-30.  Canada’s growth rate has already slowed markedly: the report said the 2001–2010 period saw average annual real GDP growth in the business sector of just 1.6%.

“As for the new decade that began in 2011, the results to date are rather disappointing,” it added. Average annual real GDP growth for businesses was only 2.2% between 2011 and 2013.

Desjardins says the average annual increase in hours worked in that period was 1.6%, while productivity growth was a weak 0.6%. Productivity growth is key, because it’s one of two factors that can increase the economy’s potential growth rate, the other being population growth, the report said.

The potential growth rate of an economy is its “cruising speed”: faster growth can stir up inflationary pressures, and slower growth threatens deflation and stagnation in living standards. Slower growth in Canada’s working population will be a downward pressure on potential growth, Desjardins said.

According to data from Statistics Canada, the slowdown began having an effect in 2010, and will peak on 2020, when the population aged 15-64 will peak.

Immigration might help buffer slowing growth of the working population, but the Statistics Canada data do factor in the impact of immigration, Mr. Durocher told Canada Real Time in an interview. “The demographic trend is very loud, and important,” he said. “It will not be possible to avoid that.”

That puts the onus for boosting Canada’s potential growth rate squarely on the shoulders of productivity growth. Those are pretty weak shoulders—Canada has been a productivity laggard for a long time.

Labor productivity growth was pretty robust  in the 1960s but dropped off in subsequent decades, averaging just 0.6% in the years 2011-13. Since 1980, Canadian productivity growth has averaged 1.2% annually, Mr. Durocher said.

He believes it will improve, but in part because it has to.

“I believe that with the problems we will face in the near future, we will be forced to have higher productivity gains,” Mr. Durocher said.

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