Is Slow Growth the New Normal for Canada?

The idea that the western world is trapped in a “New Normal” of slow economic growth has gained currency with many economists and financial market analysts. Proponents list a number of factors allegedly restraining the trend of growth, including the lingering impact of the 2008 financial crisis, an aging population, and even a slowdown in the underlying rate of innovation and technological change. Some argue that governments have exhausted their ability to stimulate the economy; others cite the uncertainty created by the unprecedented monetary and fiscal stimulus in the United States in response to the financial crisis and recession as a major drag on the recovery itself.

This paper argues that slow growth early in a recovery is not unprecedented and does not augur weak growth will continue. There is reason to believe that pessimism about growth will prove to be an over-reaction to the current environment, just as happened in the 1930s and 1970s. These past periods of prolonged slow growth ended when governments adopted better and more predictable policies. The lingering effect of the financial crisis is dissipating in the United States, which seems poised to return to above-trend rates of growth. An aging labour force is much more of a problem for Europe and Japan than North America, which has a younger population that is not projected to contract in the future because of a higher birth rate and more immigration. The possibilities for innovative technological change remain encouraging for growth, although this variable is the most difficult to project.

In Canada, growth since the recession has not been unusually weak compared with the previous two decades, reflected in the adult unemployment rate that is already at historically low levels. Canada is particularly well positioned to take advantage of an upturn in the US economy since the lasting impact of the recession upon its financial sector and labour markets has been much less pronounced than in the United States. This will help Canada overcome the recent slump in commodity prices. A further boost to growth would come from a better policy framework, especially in central Canada where provincial government debt continues to increase. More policy stimulus is not needed in North America at this time; more predictable policies would serve better.