Canada’s economic stagnation—a big problem for Canadians

This Canada Day, Canadians can be proud to live in a country with a history of peace and progress and much potential. But we can’t ignore Canada’s recent dismal economic performance and the financial pressures—driven by stagnating income growth—on households.

An important and broad measure of economic growth is gross domestic product (GDP), and per-person GDP growth is the indicator most frequently used by economists to assess the dynamism and growth performance of an economy, and most importantly, living standards.

Canada’s recent growth record has received so much attention because it is, quite simply, abysmal. One recent analysis noted that due to weak total growth accompanied by a surging population Canada has actually been in a “per capita” recession for some time. Per-person GDP has declined by 3.4 per cent in inflation-adjusted terms between the second quarter of 2022 and the final quarter of 2023.

Some analysts suggest that Canada’s shrinking per-person GDP may not be such a big deal. They argue that Canada’s population increase over the past year has been very large and that because newcomers’ incomes have historically converged towards the national average, we can expect the large recent cohort’s incomes to rise with time and the current GDP slump may turn out to be a short-term blip.

There are some problems with this argument. Most importantly, the huge increase in newcomers is largely due to non-permanent residents and we can’t be confident their incomes will in fact converge closer to the national average in the same way that previous cohorts who arrived with permanent resident status.

These are interesting and important questions, but they must not distract from a simple fact—Canada’s economy has been stagnant and characterized by little or no per-person growth for a long time.

Justin Trudeau once understood that Canada’s long-term growth challenges were an important problem for Canada. In fact, slow growth under Stephen Harper was one of Trudeau’s most effective critiques during the 2015 federal election campaign. Trudeau blasted Harper as having “the worst record of any prime minister on economic growth since R.B. Bennett in the depths of the great recession.”

And economic growth during the Harper years was indeed slow. The Harper government suffered through the 2008/09 global financial crisis and subsequent weak recovery, particularly in Ontario with its hobbled manufacturing industry. Per-person annual economic growth when Harper was prime minister was much lower than his predecessors—just 0.5 per cent annually (adjusted for inflation) under Harper compared to, for example, 0.8 per cent under Mulroney and 2.4 per cent under Chretien.

So Trudeau was right in arguing that slow per-person economic growth was one of Canada’s most pressing economic challenges during the Harper era. However, he misdiagnosed its causes, and since his government took power things have gone from bad to worse.

On his way into power, Trudeau argued that the slow growth of the Harper era was largely the result of insufficient government spending, and that looser fiscal policy with more spending and larger deficits could help spur growth in Canada (and indeed around the world). This approach didn’t move the needle on growth. In fact, under Prime Minister Trudeau, annual per-person economic growth has averaged just 0.3 per cent compared to 0.5 per cent under Harper.

All this suggests that it’s wrong to simply wave away Canada’s dreadful performance with respect to per-person economic growth as a non-issue driven by a temporary surge in lower-income non-permanent residents. In reality, Canada’s per-person economic stagnation is by now an old problem, which the Trudeau government’s spending increases and deficits have utterly failed to solve.