Canada’s economy went from struggling with productivity growth to an all-out crisis. That’s the take from TD this morning, who warns the productivity crisis is worsening. Skewed incentives have reallocated productive investment to non-productive areas, now consuming a larger share of the economy. If this persists, the bank warns that Canada will see further erosion in living standards, falling real wages, and a “dangerous” deterioration of public services.
Canada Went From Low-To-Negative Productivity Growth
For those unaware (or in need of a refresher), productivity is the efficiency of output. In economics, it’s about how much value can be produced by each hour of labor. A more productive society means more revenue flowing, helping to boost incomes, living standards, investment in capital and infrastructure, and revenue to fund public services.
A decline in productivity leads to the reverse—less cash flowing, worsening wage stagnation and public services. Ironically, a low productivity environment can lead to higher taxes, as policymakers look to capture more revenue by increasing their share.
Canada made progress through the 2010s, according to TD. It averaged annual growth of 1.2% for the decade prior to the pandemic. It’s not huge growth, but any growth is better than the current environment.
“Since 2019, it has ceased to expand at all, setting Canada apart as one of the worst performing advanced economies, not to mention in stark contrast to the United States,” explains Beata Caranci, chief economist at TD.
She warns the issue is generally observed across most industries, and there’s no quick fix. However, one industry stood out—construction.
Canada Increasingly Reliant On Construction, Where Productivity Growth Has Been Non-Existent
Canada’s construction industry has long been a drain on national productivity. The bank’s calculations show that productivity in the industry between 2009 and 2019 showed average annual growth was a point lower than the general average. From 2019 to 2023, annual growth declined more than 2.5% per year. “Construction has generated no productivity growth over the past forty years,” exclaimed Caranci.
Canada’s increased reliance on the industry has also amplified the impact on the economy. The bank’s calculations show construction now accounts for 12.6% of all labor hours, up from 7% back in 1997—not rising to double digits until the mid-2000s. They attribute the boost in-part to the recent real estate boom. Construction is now a larger share of the economy than manufacturing, after consuming much of the investment over the past few years.
The bank doesn’t see the importance of the industry fading, especially with the population boom. Consequently, they suggest fostering more industry innovation and training to improve individual output.
Unfortunately, that point doesn’t consider that would require dedicating more resources to the sector. Encouraging further investment in an industry already dragging the economy is a big gamble.
Tackling the incentive for low productivity seems like a much more effective path. State-backed stimulus driving construction to a level of demand not supported by fundamentals plays a large role in preventing firms from adopting more efficient processes. After all, if the reward for inefficiency is free money, such as government-subsidized loans and tax credits, would you become more efficient?
Speaking of incentives, the bank expresses concerns about how they skew economic activity and investment. It just doesn’t seem to stand out when they’re discussing housing.
Canada No Longer Competitive For Productive Investment
TD warns that Canada is becoming a less competitive business environment. In the early 2000s, the country aggressively cut its corporate tax rate to outcompete global peers. It helped foster the investment boom seen in the decade before the pandemic.
Since then, the rest of the world has caught up. One key shift was the US slashing its corporate rate from 35% to 21% in 2018, on top of its more aggressive tax credit system. The EU has also made cuts since the global financial crisis, ratcheting up the competition.
“With these changes abroad, Canada’s average tax rate is now roughly in line with the U.S. and OECD average, but higher than Europe,’ explains Caranci.
Adding, “A tax rate just in line with the U.S. is probably not sufficient to counteract the country’s inherent strengths in drawing in investment and talent. Canada must aim to do better in order to level the playing field.”
TD is far from the only firm criticizing the lack of productivity being fostered in Canada. Earlier this year, the Bank of Canada (BoC) warned the country’s lack of productive growth is at “crisis” levels and needs to be addressed immediately. The OECD also forecasts Canada’s per-capita real GDP growth will be dead last among advanced economies for the next 40 years. That was based on pre-pandemic data too, which has since worsened.
Canada’s productivity crisis in a nutshell:
– the gov thinks you’re a tax cheat if you have a small biz
– big companies get subsidies, small business gets audits
– the gov is using hundreds of billions to prop up home prices, so why take on the risk when the gov will mitigate it?
I’m not saying it can happen forever, but it certainly has been the case for the past decade so that’s what people see.
Well, no one can afford to live in Canada anymore. You’re expected to accept, and work really hard for below-poverty wages so greedy corporate shitheads and negligent, corrupt elected officials can continue shovelling ever more money into already wildly overstuffed pockets.
And these idiots wonder why productivity has gone into the toilet? At this rate, unless things change, Canada is headed for economic and societal collapse.
Nailed it, Steve. And corrupt officials like Trudeau will never pivot away from unproductive sectors like housing construction as there would be a huge near term economic impact — although far better for Canada longer term.
So, we’ll continue to wonder why the birth rate keeps falling (big hint: cost of housing!) and support house prices to never ever fall.
And productive Canadians like me will leave the country, taking our Gen Z kids with us, as Canada returns to being a “developing” country. It will be an economic disaster here for decades.
Zactly!
Young people traditionally have disposable income and are supposed to spend it on consumption. Now 50% of their income from their first job after taking out a butt load of debt, now goes directly to their landlord.
Seniors then have the extra cash taken from them through the corporate agreements with gov to inflate prices. It’s the circle of f-you, and anyone that thinks this changes under Pierre doesn’t realize the current environment is set up to court hit votes.
Well, that is what happens when governments at all levels put all of their GDP eggs in the real estate basket.
The damage done by poor policies will last decades. There is no easy way out of this. That’s what happens when corruption by elected officials to the favor of unelected bureaucrats are controlling the playing field. It’s to make you broke and compliant and gives them power . The middle class is eradicated and The feds are desperate for more tax money. With Carney on the radar, lookout. The end is nigh.
We are taxed to death and it seemed to go wild after the carbon tax hit. Tax on tax means triple price hikes so the big companies make their mega profits. I don’t know how any small biz can survive in this internet market. Then there is property tax, now so high it exceeds mortgage payments ! These new tax rates on homes shouldn’t happen until the house is sold at the new price for god sakes. Makes no sense. Driving us seniors out of our homes FOR TAX HIKES.
Immigration NEEDS to be increased to fix this mess!!
International students at community colleges should be increased by 500%
Too late, all lies, the damage is done. And it did not start under this PM… For 150 years home prices went up and down in price properly, with inflation, job raises….reasonable, slight increases….sometimes minor decreases… all fair and affordable. Starting around the year 2000, prices started to spike up, 25, 50, 100, 200, 500% while interest rates went to almost 0. And now look at the mess you greedy government parasites, unions, bankers have created. Mass immigration, major government growth – spending – debt – control…, super low interest rates….crazy housing prices……poor Canada, what a mess created by all you greedy governments, political parties…..The only way housing prices get back to where they should be is a crash…bring it on…..the sooner the better. Right now, it’s all grossly overvalued.
Well… circa 2000’s was the start of the (non-political) subprime market which also influenced Canada’s housing then.
https://www.investopedia.com/terms/s/subprime_market.asp
To many regulations and government feeding off it. In the asphalt business in the Vancouver area you needed 30 odd separate business licenses to operate. Each little fiefdom wanted to issue one, and collect a few hundred dollars. Not only is it nonsence the time and paperwork involved was endless. Governments need to be cut back significantly to improve the economy.
Red tape and non sense policies is mostly to blame imo. I put an application in to build a deck in May and had to jump through a ton of hoops and still have not recieved approval. And that’s just a residential deck. Jeesh
International students is a scam as tuition revenue is only at best 35% of a schools total revenue.
Guess where the other 65% comes from? 😆 Fed&Prov tax payers and & a few philanthropists 😆
There is no way to fix this at this point, repairing the tilt in the economy is going to require a full-blown recession and asset re-pricing. Too much productive capital is being sucked up by housing mania.
There is hope. Instead of allowing a full blown recession, policy makers should restrict their surgical interventions to the housing market, from where this problem arose in the first place and which is sucking up capital from the rest of the economy. If they can keep equities and the job market steady but let the financialized parts of the real estate industry crash and burn, we may have hope. Construction industry can be kept busy by building massive social housing so that should only leave brokers, speculators, investors, flippers, mortgage sellers and other usurers with the bag. True capitalism always cuts the middleman, so let these guys burn.
All levels of Government in Canada, and the 3 Major Political Parties, are killing The Host to save The Parasites.
I have lived here my entire life and I have to say now that Vancouver is lost. We are a city of do nothings for the economy except send those thousands of emails everyday! What a proud career! The entire province is barely held up by its ability to sell ancient falling apart homes at astronomical prices. On top of that, we should have followed Austrias building plan and NOT ALLOWED any housing to be investment housing period! One family…one home. No more investment from outside the country, no hedge funds, no nothing. You don’t live there? You don’t get to buy the place. And o more one guy gets to buy a different home for each of the seasons. There are so many homeless people now, others who live in tents and yet more who sleep on a sidewalk yet too many have multiple homes! It’s BS when we are talking about a basic human neccessity! I am sick and tired of the rich taking way more than their share! Other countries have earmarked new homes as non market homes again and we should take an example out of this and make homes for productive families again at reasonable prices and not a gravy train for fat cats anymore!!
Can a tradesman continue to produce more and more and more and more…. every day of every week of every month of every year… Can iPhone sales continue to increase year over year over year …. Is there a limit? I am not replacing my iPhone because it does what I need it to do. I don’t need to have more functionality every year. So productivity growth there is nada. And as a tradesman, I can tell you that I am not going to sacrifice safety to get more work done. If me taking the time to put on my harness before boarding a zoom boom hurts your dam ned “productivity” then to hell with you and your numbers. Construction takes as long as construction takes, you cannot keep getting the glue to dry faster every year.