WHY ECONOMIC FORECASTING CALLS FOR RISK MANAGEMENT
Demands of older population will reduce Canada’s potential, says Kevin Carmichael.
In December, I used Montreal-based New Look Vision Group Inc. as an example of the sort of confidence that could explain the unexpected surge in business investment during the third quarter. But I didn’t mention why chief executive Antoine Amiel was feeling so good.
Unlike, say, the automobile industry, the future burns bright for optometry. Almost everyone acquires presbyopia (farsightedness) by middle age and the population is quickly aging.
There’s also a “worldwide crisis of myopia,” Amiel said, because youngsters are spending more time indoors, reducing their exposure to natural light. “Those are fundamentally positive trends for the industry.”
New Look in November reported its 21st consecutive quarter of comparable store sales growth and its stock price has increased about 40 per cent in five years, more than double the gain achieved by the S&P/ TSX Composite Index during the same period. Things are so bright that New Look, already Canada’s biggest eyewear retailer, is on the hunt of international acquisitions, and in December it purchased a small Florida chain.
But the company’s home market will remain its main profit engine because Canada’s population is both aging and growing thanks to surging immigration rates. No other major advanced economy can boast such a combination. “Canada really is the shining star in the demographic game,” Amiel said.
But befitting a population afflicted with myopia, many of the 2020 outlooks you have read suffer from varying degrees of shortsightedness: They tend to focus on whether the economy will grow moderately faster or somewhat slower. They wonder if stock prices will claw their way to new records, or ease off the peaks achieved in 2019. They debate whether the Bank of Canada will raise interest rates a quarter of a percentage point or not at all.
A better way to think about the year ahead is to contemplate the extent to which a handful of meta-forces will disrupt our best efforts to predict the next 12 months to the tenth decimal point. Many of these calculations are based on how economies have behaved in decades past, and we know that a handful of new phenomena, such as a planet seized by climate change, will have structural implications not seen before. Forecasting the years ahead calls for risk management, not one-way bets.
Demographics is one of those meta-forces, and possibly the most important one for economic growth.
Last year should have been a bad one based on our general understanding of what makes the Canadian economy tick. The Alberta energy industry was in crisis and trade wars choked global demand for exports. The Bank of Nova Scotia’s forecasting team began 2019 thinking that the Bank of Canada would raise interest rates. It flipped midyear, persuaded that the U.S.-China tariff fight would force the central bank to lower borrowing costs. Global economic growth had slowed to its weakest since the Great Recession.
What chance did a small, open economy such as ours have in circumstances such as those?
And yet we muddled through, mostly because Canada recruited a small army of economic actors.
The population grew by almost 210,000 people in the third quarter, the biggest quarterly increase since 1971, according to Bloomberg. Most of the gain was the result of immigration, and the majority of those newcomers found jobs. The jobless rate hovered around the lowest on record since the mid-1970s. About 83 per cent of Canadians aged 25 to 54 are working, the highest percentage on record, according to Statistics Canada.
There’s little reason to expect those trends will reverse. Unlike the United States and Europe, Canadian immigration policy is tilted to receiving more newcomers, not fewer. And there’s lots of work: StatCan’s quarterly surveys of hiring intentions consistently put the number of unfilled positions at far more than 500,000. The shortage of workers partly explains why wages have started to rise after years of stagnation.
Unfortunately, demographics aren’t as unambiguously positive for the broader economy as they are for New Look. “The loudest sound of the 2020s may be the ticking of the demographic time bomb,” economists at Royal Bank of Canada said in a Jan. 3 report that previews the next decade.
Current immigration rates won’t stop Canada from joining the club of “super-aged societies,” as the Royal Bank analysis predicts about a quarter of the population will be seniors in 2030, compared with about 17 per cent currently. Unless those men and women decide to work into their 70s, the economy will fundamentally change. Consumption patterns will shift and demand for government services will increase. The Royal Bank study predicts there will be 1.7 Canadians of working age for every youth and senior in 2030 compared with 2.3 in 2010.
“The financial demands of an older population will make it harder for governments to fund key growth priorities like education and skills development, let along the vote-getting niche initiatives they often advance at election time,” the report said.
Without some kind of catalyst, demographics will reduce Canada’s economic potential. Productivity rates are weak, so the growing population isn’t generating as much wealth as it could. But positive surprises are also possible. Politicians could decide to accept even greater numbers of immigrants. Royal Bank sees opportunities in real estate, from both demand by seniors for retirement housing and the increased supply of property due to the larger homes they will abandon.
The good news is that Canada will confront these challenges from a position of relative strength. Amiel said one of New Look’s greatest challenges is finding workers so it can keep up with demand. “In many provinces of Canada, we are close to full employment for retailers and manufacturers,” he said. “It’s a challenge, but there is a flip side. It’s probably a better thing to have to pay a few dollars more an hour and have plenty of customers than the reverse.”