For all of the self-congratulatory rhetoric of the Harper government, the fact remains that Canada’s economic recovery has been built on very fragile foundations. Growth has been fueled by the growth of household and foreign debt rather than by business investment, and we have become dangerously reliant on the resource sector.
Over the entire period of recession and recovery, between 2008 and 2013, Canada's real GDP grew by 6.2%. Growth was driven by an 11.9% increase in household consumption over this period, helped by booming residential construction.
Household spending has risen by much more than household incomes, resulting in a significant increase in household debt. Between 2008 and 2013, household debt rose from 148% of after tax income to a new high of 166%. As has been widely noted, this makes households highly vulnerable to a looming correction in house prices from very elevated levels.
Business Investment and Foreign Trade (in % of GDP)
|Business investment (machinery and equipment)||5.1||4.1||4.4||4.7||4.9||4.8|
|Exports of goods and services||32.5||29.0||29.9||30.6||30.5||30.5|
|Imports of goods and services||32.1||29.0||31.9||33.1||33.7||33.6|
Source: CANSIM Table 380-0106. GDP at 2007 prices.
Canada’s recovery has also been built entirely upon the expansion of domestic demand. Between 2008 and 2013, exports have been weak and our trade deficit has soared.
Exports of goods and services fell from 34.3% of GDP in 2007 to a low of just 29.0% in 2009 before gradually recovering. However, they still stood at just 30.5% of GDP in 2013, and slipped further in the first quarter of 2014.
Exports have fallen as a share of the economy notwithstanding increases in natural resource production and exports. Exports of autos and sophisticated capital goods (industrial and electronic machinery and equipment as well as aircraft) still barely match the pre recession level.
As the OECD noted in their 2014 Economic Survey of Canada, exports are “well below levels that might be expected at this stage of the recovery, with non commodity exports being particularly weak.”
Meanwhile, imports have risen, from 32.2% of GDP in 2007, to 33.6% in 2013.
The deficit in Canada’s balance of international payments on current account was over $60 billion or just over 3% of GDP in both 2012 and 2013. This has to be financed by foreign borrowing. As a country, we have been spending much more than we have been producing.
It is widely recognized by the Bank of Canada and others that growth fueled by more household and foreign debt is unsustainable, and the hope has been that the economy will pivot to growth driven by exports and by business investment.
But this has come to be like waiting for Godot. 2014 to date has been particularly disappointing as both exports and business investment have further weakened.
The expectation of the Harper government has been that strong corporate balance sheets (over $600 billion of cash on hand) and deep federal corporate tax cuts would stimulate higher business investment and export competitiveness. But investment in machinery and equipment, a key component of a successful modern economy, has been very weak.
Such investment was 5.1% of GDP in 2008, before the recession, hit a low of 4.1% of GDP in 2009, and had recovered to 4.8% of GDP in 2013, falling to just 4.6% in the first quarter of 2014.
Business investment has been weak overall, but has been especially weak in manufacturing and in central Canada. In recent years, about one quarter of all private investment has been in mining and oil and gas extraction.
Business investment in research and development, historically weak compared to other advanced economies, has also not regained pre recession levels.
Weak business investment outside the resource sector is a major reason why productivity growth in Canada has been well below US levels. The OECD calculate that output per hour in Canada grew by a dismal 6% over the entire period between 2002 and 2011, compared to 21% in the United States. This performance is, they say, “Canada's single largest long term challenge.”
Canada compares very badly to the United States and other modern economies when it comes to boosting productivity through business investment in new capital equipment, innovation, and skills.
We clearly cannot build a strong and sustainable economy based on resource extraction and a household borrowing binge. What we need are major investments in the non resource economy to support significant increases in the production and export of sophisticated goods and services.
This is, of course, much easier to hope for than to actually accomplish.
A great deal of productive capacity, especially in manufacturing, was lost in the recession. We are structurally weak in industries serving the fast-growing demand of developing countries for high end equipment and knowledge intensive services. And the exchange rate of the dollar remains too high.
Hope is not enough, and there is no room for self-congratulation. Debate on how to turn around our under-performing economy should take centre stage in Ottawa as we approach the 2015 federal election.
This article originally appeared in the Globe & Mail's Economy Lab.