An Outlook on the Canadian Economy 2024: Canada’s Growth Problem

Canada has a growth problem. Despite being a country abundant in natural resources, with a highly educated population and access to global markets, its economic momentum has slowed significantly in recent years. Since the 21st century began, and particularly following the pandemic, Canada’s productivity and economic output have fallen behind major global competitors. While higher interest rates since 2019 have slowed per-capita output, the roots of this problem run much deeper.

Canada’s economy today is smaller than it was in 2019 when adjusted for inflation and immigration. It’s essentially in the same position as it was a decade ago. This stagnation is troubling, especially when compared with other countries like Australia and the U.S., where productivity and per capita output have outpaced Canada by a wide margin. But there’s hope: solving Canada’s growth problem is attainable, and the benefits would be enormous, both for individuals and businesses alike.

Falling Behind: The Productivity Gap

Canada’s decline in productivity is particularly striking when viewed in a global context. In the early 2000s, Canada’s economic output per person was on par with Australia, but today, Australians are almost 10% more productive. The U.S. presents an even starker contrast. Canada is now 30% less productive than the U.S., and in terms of economic performance, it’s closer to lower-income states like Alabama than to tech-rich powerhouses like California or New York.

This productivity gap has real consequences for Canadians. On average, Canadians earn 8% less in wages than their American counterparts. Capital investments have also been sluggish—$1,000 invested in Canada’s main stock index in 2000 would be worth $4,400 today, while the same investment in the U.S. S&P 500 would be worth $6,000, a difference of 35%.

What’s Holding Canada Back?

Canada’s lagging productivity can be traced to a few key factors:

Lack of Investment in Key Sectors: While real estate, construction, and public services like hospitals have received significant investment, many other critical sectors, such as manufacturing, mining, and oil and gas, have seen declines in investment. These industries were once powerhouses of growth and productivity but are no longer pulling their weight in driving the economy forward.

Deindustrialization: The gradual deindustrialization of Canada has eroded much of the country’s economic potential. Manufacturing, which was a significant contributor to economic growth in the 20th century, now makes up only half of its share in 2000. Mining has similarly declined, and while oil and gas are showing signs of resurgence, investment levels remain far below what they were a decade ago.

Small Business Dominance: Small businesses account for 98% of all businesses in Canada. While they are integral to communities and offer essential services, small businesses tend to be less productive than larger enterprises. Their limited scale and resources make it difficult to invest in innovation and growth, contributing to Canada’s sluggish overall productivity.

Internal Trade Barriers and Red Tape: Canada’s regulatory and administrative inefficiencies are well-documented. Internal trade barriers, where provinces and territories have conflicting regulations, make it difficult to move goods, services, and even skilled workers across the country. Infrastructure chokepoints and unnecessary red tape slow down international trade and prevent Canadian businesses from reaching their full potential.

Real Estate Focus: A large portion of savings and investment in recent years has flowed into real estate, an industry that, while important, does not generate the same kind of productivity gains as sectors like technology, advanced manufacturing, or renewable energy. This focus on real estate has come at the expense of other industries that could drive more sustainable, long-term economic growth.

A Missed Opportunity: The Immigration Boom

One of Canada’s greatest strengths is its immigration policy. Since 2000, the country has welcomed over seven million people, many of them well-educated and of working age. This influx has helped offset the retirement of the baby boomer generation and provided Canada with a larger workforce than ever before. But due to productivity issues, Canada has not fully capitalized on this demographic advantage.

While Canada’s workforce has grown, mismatches between education and job opportunities, as well as barriers to the full utilization of immigrant skills, have hampered economic growth. There is a real opportunity here to better integrate immigrants into the workforce and ensure they are employed in jobs that match their qualifications, driving both innovation and economic output.

Learning from History: Canada’s Golden Age of Productivity

Canada wasn’t always struggling with growth. In fact, the 1950s and 1960s were a golden age of productivity, with average annual productivity growth of 5% and 3.5%, respectively. These gains were driven by the post-war economic boom, the automation of the manufacturing sector, and significant policy achievements like the 1965 Auto Pact with the U.S., which opened up trade and boosted industrial growth.

However, productivity gains began to slow during the economic turbulence of the 1970s and 1980s, and while the 1990s saw a resurgence thanks to expanding global trade and innovations like container shipping, the momentum has since faded. The task now is to recapture that spirit of innovation and investment that fueled Canada’s post-war prosperity.

The Path Forward: How to Boost Growth and Productivity in Canada

Addressing Canada’s growth problem isn’t easy, but the solutions are clear and actionable. Growth-minded policies can benefit workers, businesses, and investors alike, creating a more prosperous future for all Canadians.

1. Cutting Red Tape and Reducing Internal Trade Barriers

One of the most significant drags on productivity is bureaucratic inefficiency. Streamlining regulations and reducing internal trade barriers between provinces can make it easier for businesses to operate and expand across Canada. This doesn’t mean lowering standards—it means creating more consistent regulations across jurisdictions to reduce costs, speed up project approvals, and make trade more efficient.

2. Better Utilization of Immigrant Skills

All of Canada’s population and workforce growth is now driven by immigration, and ensuring that immigrants’ skills are better matched to jobs is critical. Credential recognition and more targeted employment programs can help immigrants transition into roles where their expertise is valued, driving productivity and filling critical gaps in the Canadian labor market.

3. Improving Tax Competitiveness

Canada’s tax system has become increasingly complex, which can deter investment and stifle growth. While overall tax levels are relatively low compared to other economies, simplifying tax codes and reducing the cost of compliance could make Canada a more attractive destination for foreign and domestic investment.

4. Adopting New Technologies

Canada has fallen behind in the adoption of new technologies like artificial intelligence, advanced manufacturing, and clean energy solutions. Incentivizing businesses to invest in technology and making it easier to access funding for such investments is crucial for improving global competitiveness and driving future growth.

5. Capitalizing on a Highly Educated Workforce

Canada’s highly educated workforce is one of its greatest assets, particularly in a global economy that is shifting towards services and knowledge-based industries. Ensuring that education leads to meaningful employment and that investments in innovation, research, and development are translating into real economic gains is critical for boosting productivity.

A Mindset Shift: Focusing on the Future

One of the most powerful tools for solving Canada’s growth problem isn’t a specific policy—it’s a mindset. As a country, Canada needs to collectively focus on building an economy of the future—one that celebrates innovation, competitiveness, and investments in both people and technology.

If Canada can close the productivity gap with the U.S., it could add roughly $20,000 of GDP per person per year. That kind of growth would transform the economy and bring significant benefits to Canadians across the board, from higher wages to more competitive businesses.

Conclusion: Turning a Challenge Into an Opportunity

Canada’s growth problem is a challenge, but it’s also an opportunity. The country has the resources, talent, and market access to thrive in the global economy. By addressing inefficiencies, investing in new technologies, and better utilizing its highly educated workforce, Canada can once again become a leader in productivity and economic growth.

It’s time for Canadians—businesses, governments, and individuals alike—to adopt a growth mindset and focus on building an economy that rewards innovation, encourages investment, and delivers prosperity for all. With the right strategies, Canada’s growth challenge can become its next great success story.