Accepting slow growth as the economy’s New Normal carries several serious risks
After a decade of pedestrian increases in economic output, the federal government wants Canadians to believe our economy is no longer capable of sustaining higher growth. Pessimism about long-term growth prospects is embedded in the government’s plans. The 2021 budget foresees annual growth slumping below two per cent from 2023 on, after having decelerated to 2.2 per cent in the 2010s.
This echoes the pessimism of subscribers to the “New Normal” doctrine that advanced nations have entered an age of chronic slow growth. The New Normal hypothesis emerged in the aftermath of the 2008 global financial crisis. Former U.S. Treasury Secretary Larry Summers coined the term for the forecast from Northwestern University’s Robert Gordon that annual per capita real GDP growth will average less than one per cent for the next several decades. Gordon, Summers and others argue slow growth will persist both because societies are aging rapidly and because the transformative technological advances of the 20th century will not be repeated. A variant on this them is French economist Thomas Piketty’s gloomy prediction that income growing more slowly than capital would drive income and wealth inequality to extreme levels, further depressing economic growth.
Though arguments for a New Normal may seem plausible other interpretations of the recent slowdown are more convincing. The main alternative blames much of the recent record of sub-par growth on poor policies. For example, the Bank for International Settlements has attributed the protracted slump to the dulling impact of relentless monetary and fiscal stimulus on potential growth. If policy is to blame, that’s actually encouraging: it is more easily corrected than structural forces are.
Washington Post columnist George Will argues that accepting the inevitability of slow growth simply excuses such policy failures. As he puts it, “Making slow growth normal serves the progressive program of defining economic failure down.” If slow growth is somehow inevitable, environmental policies that have strangled growth with higher taxes, regulations, and refusals to approve projects have strangled what was doomed anyway.
Accepting slow growth as the economy’s New Normal carries several serious risks. By encouraging governments to fixate on redistribution — in the belief that the economy has become a zero-sum game in which one group can improve its lot only at the expense of another — it becomes self-fulfilling. Former Bank of England Governor Mervyn King described the resulting vicious cycle: “With stagnation comes a breakdown of trust. One person’s gain is another’s loss. The cooperative arrangements that typically characterize a period of economic expansion begin to fall by the wayside, threatening to lock in stagnation for the long run.”
More broadly, pessimism has a negative impact on the psychology of a society, as seen in Argentina and Japan during their long periods of economic stagnation. King argues this broader impact on sentiment results from the fact “our societies are not geared for a world of very low growth. Our attachment to the Enlightenment idea of ongoing progress — a reflection of persistent post-war economic success — has left us with little knowledge or understanding of worlds in which rising prosperity is no longer guaranteed.”
For optimists, the idea of secular stagnation is simply over-reaction to a transitory period of poor growth interrupting a long upward trend. Past periods of stagnation also generated despondency about the future. The term “secular stagnation” was originally coined in 1938 to describe how slow economic and population growth reinforced each other. But then the economy was surged during the post-war baby boom. A similar wave of pessimism followed the sudden slowdown in the mid-1970s. Alarmist forecasts that the post-war boom was over coincided with widespread angst over rising commodity prices and stagflation. But these gloomy predictions proved unfounded when the Reagan and Thatcher revolutions re-ignited growth in the 1980s and into the 1990s.
Over the centuries, optimism about long-term growth has always been vindicated. As growth theorist Paul Romer has observed, “The historical pattern has been one of accelerating growth — not just sustained growth but accelerating growth.” There are few reasons to think technological innovations have been exhausted. Patricia Meredith of the University of Toronto outlines numerous technological advances in today’s world, including “robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the Internet of Things, advanced wireless technologies, 3D printing, and driverless vehicles.”
The optimistic view is that the recent slowdown reflects normal adaptation as society shifts to more powerful technologies. The seeds of faster growth have been sown but will take time to sprout and mature. As former Fed Chair Alan Greenspan observed, “The IT revolution provides a chance of extending to the service sector the sort of productivity gains that we are used to in the manufacturing sector.” Technology’s ability to boost many service industries has been on full display during the pandemic.
Romer explains how history has consistently surpassed gloomy expectations: “Every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered … Possibilities do not merely add up; they multiply.” When the main problem is that governments have adopted environmental and redistributive policies that hamper economic growth Canadians should not accept the inevitability of slow growth. Disruptive technological change is opening the door to higher potential growth.
Philip Cross is a senior fellow at the Macdonald-Laurier Institute.
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.
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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.
The Canadian Press. All rights reserved.
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.
The Canadian Press. All rights reserved.
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