Canadian economy faces consumer sector, productivity concerns

Buoyed by a strong consumer sector, Canada’s economy is set to grow at a low rate over the next couple of years. There are, however, worrying undercurrents in Canada’s consumer sector for the short term, as well as lingering productivity concerns, according to RSM's quarterly “The Real Economy” report.

The Bank of Canada is projecting growth of 1.5% in 2019, 1.7% in 2020, and 1.8% in 2021 – which are realistic low-growth estimates within a context of global uncertainty, a lingering trade war between the US and China, and low global interest rates.

Consumer spending accounts for nearly 57% of GDP measured by expenditure, with government spending accounting for 20% and investment spending taking up 20%.

The RSM report notes there are multiple reasons to be concerned about the all-important consumer sector in the short term. Though the unemployment rate is a low 5.5%, there are pockets of high unemployment in certain provinces (Atlantic Canada, historically). Meanwhile, increasing housing and living costs in the country’s urban centres are squeezing standards and causing tension. Foreign and domestic demand for housing stock continues to feed an ever-growing bubble, and the Bank of Canada is worried about Canadian debt burdens tied to housing prices which are completely out of relation with average income.

Canadian household sentiment is highly linked to trends in US economic growth, so the erratic trade and investment policies from Washington further add to the risks.

In the long term, however, the outlook for the consumer sector is more positive, according to the report. There is a growing amount of educated workers in the labour force, with 1.4 times as many high school graduates as in 1990, twice as many with post-secondary degrees, and nearly four times as many with university degrees. Because of labour force improvement through investment into intellectual capital as well as rising immigration, RSM says you can expect higher productivity and upward pressure on wages.

On the immigration front, Canada has been attracting high-skill workers to replace aging populations. According to Stats Canada, most of the growth in immigrant employment has been in “professional, scientific and technical services; finance, insurance, real estate and leasing services; manufacturing as well as health care and social assistance.”

As a result of immigration, Canada’s population growth was 1.4% in 2017-2018, higher than the US (0.7), England (0.6), and Germany (0.3). According to the Conference Board of Canada, without the existing immigration policy, the country’s labour force and economic growth would shrink from a trend rate of 1.9% to 1.3% annually.

Technology-based enterprises have been a bright spot for the economy, with the information and technology sector growing at an annual rate of 4%. The energy sector, hit by price shocks and decreasing demand, declined by 3.9% and appears to be trending downward, according to RSM.

Despite the fact that Canada’s ICT sector has grown substantially and remains a world leader in AI research, Canada’s economy still has lagging productivity growth. Indeed, Canada’s growth rate in labour productivity has been losing ground to the US over the past three years, creating a wage gap. The gap is the largest it’s been in 20 years, with Canadian GDP per capita at 76.9% of the US figure in 2018.

Though decreasing investment and falling oil prices have contributed to the decline, RSM’s report points to decreasing levels of investment in IT and communications technology, as well as low levels of adoption of advanced technology like artificial intelligence by Canadian businesses, as being major factors in Canada’s lagging productivity.