The 8.7 per cent growth in GDP for 2021-22 may be one of the fastest rates in the world but in absolute terms it only restores the economy back to 2019-20 levels. This may also suggest resilience especially if we look at how individual components moved in a supply (GVA) and demand (GDP) format
The contraction in supply during 2020-21 was across the board (except agriculture) and quite obviously due to constraints imposed by the pandemic, war and even climate. The recovery in 2021-22 reflects the easing of some of them, besides of course the low-base effects.
On the demand (GDP) side, the fall looked more likely due to contraction in economic activity in 2020-21 than any long-term decline in incomes, which is also supported by the fact that recovery came with the revival of economic activity.
This is clearer when we look at the individual components of demand. The 5.4 per cent decline in private consumption, the largest driver of growth, was due to declines in spending on personal transport (-14 per cent) and transport services (-24 per cent) rather than food, which is the biggest item of consumption. In fact, spending on food went up (4 per cent) despite declining incomes, in no small measure due to government relief measures as well.
Services demand also declined (-9 per cent) reflecting the overall contraction in economic activity, especially in the so-called ‘non-contactless’ sectors.
As for the other major driver, private investment, it was in decline even before the pandemic and continued to fall (-12.7 per cent). Net foreign trade has always impacted GDP disproportionately to its share, due to the fact that trade deficits are subtracted from GDP.
Thus, the large fall in deficit during 2020-21 (-39.1 per cent) helped soften the decline in GDP. But strikingly, as things eased up in 2021-22, imports led by petroleum, jumped 35 per cent causing net trade deficit to rise by a whopping 127.5 per cent. Finally, net taxes to government also fell sharply (-24.9 per cent) in 2020-21, pulling GDP down more sharply than GVA, since taxes separate the two ( see table).
There is a common link in all these components viz. energy, specifically petroleum, which now has an all-pervasive influence. For one, petroleum and energy-based items now account for about 18 per cent of private consumption spending (growing at an average 10 per cent prior to the pandemic) and the sudden drop of 16 per cent during 2020-21 dented GDP. Next, petroleum contributes almost a fifth of all indirect taxes (Centre and States together) and indirect taxes are about 50 per cent of all tax revenues.
This is a significant dependence which explains the huge fall in taxes (-24.9 per cent). A third aspect is that petroleum imports, on average, are about 85 per cent of trade deficit and the impact that deficits have on GDP, inflation and external value of the rupee is well-known.
Finally, the petroleum link to inflation is unmistakable. It was earlier understated in core inflation calculations because of the structuring of weights (fuel and light did not include petrol and diesel but were under transportation services).
But the fact that modified core inflation (introduced since June 2020, excluding all fuels) has been running lower than conventional core inflation shows the impact of fuel prices.
Chain effect
The energy intensity of the economy is not its only problem. The low-income trap (per capita income under $2,000) is itself the result of several legacy structural deficiencies — informal economy, low labour force participation, low literacy and low productivity. Low incomes create a chain of impact.
It restricts the consumption and demand base needed for growth, but importantly narrows the tax base, which is crucial for financing government intervention in the economy, necessitated in the first place by low income and high inequality.
This has led to a significantly high dependence on indirect taxes (49 per cent), which is not only regressive but also unsustainable in the long run. This sets in motion another chain of effects that we have seen at work — fall in consumption leading to fall in taxes, increase in borrowings and inflationary pressures.
The import intensity of energy adds to the woes — persistent trade deficits require higher levels of foreign exchange reserves, which are now increasingly dependent on capital flows (FDI, portfolio investment) than trade and whose impact on inflation and exchange rates cannot be ignored.
The recovery in growth is akin to the economic machine restarting after power is restored to it and cannot be construed as the beginning of a new growth story. The question is not about being the fastest growing economy but about the rate that would propel it out of its low-income orbit and its attendant problems.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
