Canadian economic growth’s lost decade

November 11, 2009

OTTAWA — It may one day be remembered as the lost decade, in economic terms, The Canadian Press

A new report published by the TD Bank says Canada is headed for a decade of stagnant growth that will test the budgets of Canadian households and governments alike.

The bank says a combination of post-recession adjustments, the aging population and low productivity will limit Canada’s potential growth to about two per cent over the next 10 years.

That is two-thirds the level of growth experienced the previous two decades, the report says.

And it could be even more muted than that. The bank said the ”other elephant in the room“ that could further depress economic growth is the measures governments may adopt to control climate change.

”It is critical to recognize that things will not simply return to how they were,“ economists Derek Burleton and Grant Bishop wrote.

“This (muted growth) represents a new normal for the budgets of households and governments, as well as the returns on domestic capital investment.”

And there is not much that anyone can do about it, the economists said in an interview.

Structural adjustments brought out by the recession will keep potential growth — broadly defined as sustainable growth when an economy is at full capacity — at about 1.6 per cent for the next three years.

Actual growth will likely edge higher during this period until the economy shakes off the rust from the recession and returns to full capacity.

But then Canada will be hit by an aging workforce time bomb as the baby boom generation moves into retirement — restricting growth to about 2.1 per cent from 2013 to the end of the century’s second decade.

“The real depressing element is lower labour force growth,” explained Bishop. “There is no way to fix the fact the (baby boom generation) will be leaving the labour force and there aren’t going to be enough people to replace them.”

Burleton notes that Canada will not be unique among industrialized countries in entering a lengthy period of more modest economic activity.

The U.S. economy will be operating under a speed governor for some time. Federal Reserve officials issued a fresh warning Tuesday that unemployment, which topped 10 per cent in October, will remain high for the next several years and continue to restrain needed consumer spending.

Where Canada is somewhat unique, particularly compared with the United States, is its history of low productivity gains, which Burleton calls the country’s ”Achilles heel.“

The economists say Canadian workers will be able to produce more going forward, partly because of government policies like tax harmonization and increased business investment in machinery and equipment. But it will not be enough to overcome the loss of workers to retirement.

“Without attention to Canada’s languishing performance in technological innovation, a renewed emphasis on building a highly skilled workforce, and a reduction in regulatory barriers to competition, productivity growth will continue to stagnate relative to our international peers,” the report asserts.

For Canadians, this means modest income growth with real per capital gross domestic product — a proxy for living standards — increasing by about one per cent for the decade, half the rate of the two previous decades.

”Household income cannot outpace economy-wide growth over the long haul,“ the economists point out. ”(And) households cannot continue to borrow at rates exceeding income growth and prospective asset appreciation.“

For governments, the challenge will be how to return to balanced budgets as revenue growth slows well below what they were used to before the recession.

The economists say one possibility is for governments to increase taxes. The other is severe spending restraint in the range of two or three per cent — less than half pre-recession levels.

”It’s within the realm of possibility governments can balance budgets without tax increases, but it will take hard choices on the spending front,“ Burleton said.

The TD Bank report is not the first to warn of lower growth potential going forward and the perils of an aging population.

The Bank of Canada’s latest monetary report estimates potential output of 1.2 per cent this year, rising to 1.9 per cent in 2011, but does not project further into the future.

The parliamentary budget officer, Kevin Page, has also recently spoken on the challenge to government finances posed by an aging population and is expected to issue a major report on the issue early next year.

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