National Post (National Edition)

Per capita economic growth has stalled

- JACK M. MINTZ

The 2020 pandemic year has brought more than just a plague. It stopped Canada's economy dead in its tracks. What's even more surprising, though, is that we have just gone through the worst five-year period for per capita economic growth since the Great Depression.

At the end of 2015, real per capita GDP was $51,158 (in $2012). As of October 2020, it is $50,510 in those same 2012 dollars. We are poorer today than we were at the end of 2015 by $650 per person — or $2,600 for a family of four.

After the initial shock of the Great Depression, good years always more than made up for bad so over any five-year period growth was always positive. Not any more.

The pandemic obviously wreaked havoc on hours of work and personal income (excluding debt-financed government transfers, which dropped like manna from the heavens). But since 2015, the only decent year for real per capita GDP growth was 2017, at 1.94 per cent. In each of 2016, 2018 and 2019, growth was around zero (and in fact below it in 2016, at -0.14 per cent). Add in a 2020 so terrible it swamped the previous four years and the overall decline in per capita GDP is no surprise.

When its economy flatlines, that creates immeasurab­le harm for a country. Employers can't increase their payrolls. People have less discretion­ary income after covering their fixed obligation­s. Businesses invest less and government­s find social programs less affordable. People become unhappy. Social problems abound.

And if a country grows less quickly than its peers, its talented workers move to greener pastures. U.S. per capita growth 2016-19, leading up to the pandemic, was stellar at 1.7 per cent per year, a full point higher than Canada's 0.7 per cent. A one-point higher growth rate makes a world of difference in prosperity. When the growth rate is 1.7 per cent, $50,000 in per capita GDP grows to $70,000 over 20 years — but only to $57,500 if growth is just 0.7 per cent.

Which is why Canada is falling behind. Our per capita GDP was about $11,300 below the U.S. in 2016 (based on World Bank data using 2017 internatio­nal dollars). That difference grew to $14,000 by the end of 2019. Before the pandemic we had slipped almost $2,700 per person. In terms of per capita incomes, we are now more like Louisiana than Joe Biden's Delaware. Add in the 2020 recession year, and Canada lags the U.S. even more. Using IMF estimates reported this week and adjusting for 2020 population growth, the per capita GDP “growth” rate in the U.S. for 2020 was minus 2.9 per cent vs. minus 6.3 per cent for Canada.

As Statistics Canada's

John Baldwin has pointed out, our economic growth rate has been declining for years. As shown in the chart here, it was robust during the 1961-70 period but steadily declined to average only 0.5 per cent per year in the decade 1991-2000. Better news followed in 2001-2010, reflecting a commodity boom, balanced budgets and lower personal and corporate taxes but that decade ended with a deep recession due to the global financial crisis. The years 2011-2015 were disappoint­ing in part because of the collapse of commodity prices at the end of 2014. And then came our disastrous past five years.

Why the slowdown and now standstill in growth? Growth happens when people can find well-paying jobs, invest more and innovate. Keynesian “animal spirits” also play a role. Before the pandemic hit, Canada's employment rate had improved, with 61.9 per cent of Canadians over 15 years of age employed in 2019 compared with 61 per cent in 2016. So underemplo­yed labour was not our problem. Nor was poor training: Canada compares well internatio­nally in education and digital learning.

Investment has been lagging in Canada, however. Business and public fixed capital formation has been basically flat since 2015. Residentia­l and public investment have both grown but non-residentia­l business investment has fallen 14 per cent since 2016. This is due to weak investment in oil and gas but also in manufactur­ing. Stalled investment means businesses don't adopt the latest technologi­es embedded in machinery and structures.

The creation and adoption of ideas have also stalled. Business expenditur­e on research and developmen­t was more or less steady 2014-18 at 2.2 per cent of revenues but that masks a 10 per cent decline for companies with more than $10 million in R&D expenditur­e. Business investment in intangible assets (digitizati­on and innovative property) is virtually flat after 2012.

Something has happened to our businesses' animal spirits. Incentives to innovate are undermined by regulation­s that protect too many sectors from competitio­n, including banking, telecommun­ications, power generation and distributi­on, dairy farming and various profession­al groups. Our corporate tax system is competitiv­e for marginal tangible investment­s but not for projects with intangible assets. Regulation­s that cause slow permitting, contract approvals and constructi­on of infrastruc­ture also undermine growth.

With the pandemic still raging and vaccinatio­ns proceeding slowly, 2021 will not be a barnstorme­r year for Canada. Coming out of it, we will need to improve our rate of economic growth if Canadians want to continue to enjoy a high standard of living.

WE ARE POORER TODAY THAN WE WERE AT THE END OF 2015 BY $650 PER PERSON.

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